Line of Credit Explained

n order to stay afloat, small businesses need a constant supply of cash to keep up with recurring expenses and the cost of growth opportunities.

But finding that constant supply is hard. In fact, 50% of small businesses have experienced cash flow problems, and 1 in 5 business owners experience recurring cash flow problems.

There are a number of ways to deal with the inconsistent revenue and costs associated with running your small business, and one of the best options is a business line of credit. A business line of credit is a flexible, often low-cost way to cover short-term financing needs such as purchasing inventory and making on-time payroll.

How does a business line of credit work?

A line of credit, or revolving line of credit, is a flexible loan option for businesses. Businesses are allocated a specified maximum amount of capital available to them through a lender based off certain factors such as current cash flow and business credit rating.

The business then decides when, if, and how they would like to use that capital. Interest will be charged only when you decide to pull money from the line. You will have a specified repayment period, but, like a credit card, there is no penalty for paying early (in fact, it is encouraged).

Although interest is only charged once you use the line, there may be a monthly maintenance fee for letting your line of credit sit unused. Check with your bank or lender to see if that is the case for any line of credit you are considering.