46% of small businesses use personal credit cards. Is a business line of credit different from a personal line of credit? Or are they just the same thing with different branding?
As a small business owner, you might have been toying with the idea of different loan options, including a business line of credit. Even if you don’t need financial help right now it might be good to have extra security in case unexpected opportunities arise.
In this guide, we’ll discuss what is a line of credit, the pros and cons of this financial management option, and how to apply for a loan. Find out more below!
Table of Contents
What Is a Line of Credit?
A business line of credit is a flexible loan for small businesses that functions as a credit card would.
Companies are assigned a credit line and withdraw funds on an as-needed basis to pay for inventory, expenses, or new opportunities. Interest accrues only on the amount due in the account. As the funds borrowed are paid back, the funds available are then replenished.
Fund access varies depending on the institution. Generally, business owners can use a checking account, credit card, or routing number.
How Is a Business Line of Credit Different From a Personal One?
Right now you might be using your personal credit card to fund your business line of credit. Now that you know what is a line of credit for business we’ll warn you! It’s good from the get-go to separate your personal and business finances like church and state!
A business line of credit is easy to use, just like a personal one. But often they have better perks like higher credit lines, lower interest rates, longer periods before interest accrues, and discounts for early payment.
Pros and Cons of a Business Line of Credit
The major pro of a business line of credit is access to capital to propel business growth. However, there are drawbacks to consider:
Pros:
- Say “yes” to more business opportunities that require capital
- Cover payroll
- Purchase inventory, equipment, and more
- Unlike a loan, you only pay interest on what you use
Cons:
- You have to pay everything back+ in interest
- If your personal credit is poor, it could be hard to obtain
- Easy to get carried away with spending
How to Apply for a Business Credit
It’s fairly easy to get a business line of credit. These are the general requirements-but it always varies depending on the institution you’re borrowing with, your businesses incorporation status, and sometimes your personal credit score and income:
- At least six months in business
- Proof of income to repay loan (minimum annual revenue)
- Good standing credit score
You can apply online or via phone with most lenders. You’ll need tax returns for you and your business, bank account information, and business registration.
Is a Business Credit Line Right for You?
The answer is it depends. Know that you understand what is a line of credit, there are a few factors to consider when determining if a business line of credit is the right step for you:
- Your debt-aversion
- Current business cash flow and income
- Other feasible options (VCs, crowdfunding, etc.)
- Do you want to incur interest
- How much money do you need and how soon
Asking yourself these questions is an important first step in deciding if you should seek a business line of credit. Continue reading our business tab for more insider tips!