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How to shop for business lines of credit
All businesses have to adapt to change, especially in times of crisis, growth, or uneven cash flow. If you need a flexible source of cash, an unsecured business line of credit may be a good option.
What is a business line of credit?
A business line of credit is a type of credit that has more in common with a business credit card than a business loan. Like a credit card, it allows you to borrow up to a certain limit, but you only have to pay interest on the money you withdraw from your line of credit. As long as you don't exceed your credit limit, you can draw and repay funds as you wish. Unlike a small business loan, you don't receive an initial lump-sum disbursement that requires a monthly payment.
Small business lines of credit are typically offered as unsecured debt, which means they don't require the borrower valuable assets as collateral if it defaults on the debt. Most business lines of credit come with a variable interest rate and have credit limits of up to $100,000.
Businesses use lines of credit to gain access to short-term funding. The main reason companies need a line of credit is to finance operational expenses like supplies and payroll or to purchase a larger inventory.
How do business lines of credit work?
The main advantage of business lines of credit is how flexible they are. Unlike most small business loans, they are not designated for a specific purpose or purchase. Lines of credit are contracts between a lender and a borrower that provides a maximum credit limit from which the borrower can withdraw funds. With a line of credit, you can borrow funds at any time as long as you don't exceed the maximum amount. If you withdraw money, that amount is deducted from your total credit limit, and whenever you make a payment, your credit limit goes back up.