A business credit line is a very used borrowing tool in the businesses arena. It works as a credit card in several different ways. For instance, it does not have a set length or established monthly payments; your monthly payment depends on how much you have borrowed. Also, the rate that is charged is a variable interest rate based on economic market indicators.
A business line of credit works by offering a lump sum of pre-approved funds to a business. When using a credit line, the business only needs to take out money as the need arises.
It's the business manager's decision to take as much or as little money as it needs in a specific situation as long as the funds withdrawn are less than the credit available in the line of credit. In addition, many businesses choose a business line of credit as the borrowing tool of their choice because the business only pays interest in the used money.
Businesses can decide to take out money as frequently as it needs as long as there's enough balance available in the credit line. You can think of a line of credit as a pre-approved source of money waiting to be used when needed.
When you have a business line of credit, you can take money out using a check or withdrawing cash. Your minimum balance is usually the interest charged on the balance. If you choose to, you can pay off a portion or all of the used money to increase the available credit.
When you choose to apply for a business line of credit, you can choose among two different types:secured and unsecured.
If you choose to apply for a secured credit line, your business must have some collateral to back up the line of credit. This back up works as a guarantee on the line of credit. The advantage of a secured credit line is that the business or the business owner credit history is not as critical.
In an unsecured credit line, the business doesn't need to have any collateral to back up the funds from the business line of credit. In this case, the business or the business owner must have a very strong credit history.
Of course, you'll always get better terms when your business applies for a secured credit line. This is so because the bank takes less of a risk when approving the line of credit.
If you are starting your business and can't offer much of collateral, you may need to apply for an unsecured credit line. In this situation, you may have to be prepared to pay higher rates and receive a smaller credit limit.
