Business lines of credit are a great resource for companies, whether they’re starting out or looking to maintain their success. This article goes over what business lines of credit are.
Business Lines of Credit vs. Loans
One of the easiest ways to understand how a business line of credit works is by comparing it to a traditional loan. With a loan, the business obtains a certain amount of money from the lender in a lump sum. Then, the business pays the amount back plus interest on a set schedule of monthly payments.
Business lines of credit, by contrast, work more like a reservoir from which the business can draw money as needed. For instance, a business might obtain a line of credit of $2,000. If they only need $500 to cover a certain expense, then the business only draws that amount out, leaving $1,500 in the reservoir. In this example, the business pays back the $500 plus interest over time, at which point the reservoir returns to $2,000. (The interest rate will depend on the specific agreement between the business and lender, but in many cases, it will be lower than a traditional loan.)
Uses of Business Lines of Credit
Business lines of credit have many uses, as highlighted by Chron.com. They can be used to cover working capital needs; for example, if vendors have not paid your business yet, but you need funds to pay your employees, a line of credit can fill the gap. More specialized lines of credit can be used to purchase assets, fund construction, or even purchase real estate. However, many businesses simply use lines of credit to cover unexpected expenses and short-term funding needs. Talk with your specific lender to find out what they offer and what setup is best for your needs.
Blackwater Capital Funding’s other blog posts cover many different business-related topics, so if you want to keep learning, be sure to check them out.