A business line of credit is a flexible loan for businesses of varying types and sizes. It allows businesses to borrow funds up to a certain amount when needed. In the opinion of Charles Spinelli, a business line of credit can be either secured or unsecured. Secured business lines of credit allow businesses to use their assets as collateral against the loan. On the other hand, unsecured business lines of credit do not require any collateral.
Charles Spinelli provides a brief insight into business line of credit
A business line of credit is quite a flexible financing solution. It offers a predetermined sum of money for borrowing and repayment. These funds can be used by discerning businesses as necessary to handle inventory or operating expenditures. As opposed to term loans, lines of credit can be “revolving”. This means that businesses may borrow, repay, and re-borrow up to the approved limits. Business lines of credit typically provide continued access with flexible use and repayment options, while term loans are set with lump sums payable in installments.
Business lines of credit usually work by offering smaller loan amounts than traditional business loans, and usually have a much faster funding procedure. Lenders usually provide the funds in just a couple of business days. Business lines of credit are a type of gap financing ideal for managing short-term financial needs, like purchasing inventory or covering operational expenses when cash flow is tight.
As per Charles Spinelli, the repayment terms of a business credit line may vary from one lender to another. Hence, businesses get the freedom to choose a term that effectively aligns with their financial situation and needs. Owing to increased flexibility and risk, business lines of credit may have slightly higher interest rates than regular business loans. There are several factors impacting their interest rates, including:
- Credit history: Companies that have a good credit history generally enjoy more budget-friendly interest rates.
- Time in business: Established companies typically receive better borrowing rates than newer businesses, as newer companies are often considered riskier.
- Annual revenue: A higher yearly revenue shall demonstrate the ability of the business to timely repay its loans, which can help it achieve better interest rates.
A business line of credit can be revolving or non-revolving. A revolving line of credit allows businesses to borrow, repay, and borrow again up to a stated maximum. The ability to adjust is pretty similar to having a credit card, where the credit available increases once the borrowed amount is repaid. As a revolving line of credit allows companies to withdraw money as needed without having to reapply for credit, it can be a useful financial instrument for controlling changes in cash flow.
A non-revolving business line of credit, on the other hand, offers a specific amount of money that can only be utilized once. Subsequent to using this line of credit, the borrower cannot withdraw more money without requesting a new line. A non-revolving business line of credit is best suited for companies that require a certain amount for a one-time expense.