A business line of credit provides business owners with a flexible form of financing. It functions as revolving credit—that is, you have a credit limit and can use and pay back funds on an as-needed basis. Unlike a loan, your line of credit will only be charged interest on the money you actually use.
For example, let’s say you open a LOC with a credit limit of, say, $50,000. You’ll draw money as needed—maybe $1,000 to purchase some deeply discounted inventory and maybe $30,000 so you can make payroll on payday. You’ll pay interest on that $31,000, and you’ll have $19,000 left to use. But if you pay back $10,000, you’ll have $29,000 to use.
That probably sounds a lot like your credit card, but don’t confuse the two. Both a business line of credit and a business credit card give you revolving credit with credit limits, payment schedules, and interest on what you use, but there are some key differences.
A business line of credit allows you to simply and cheaply get a cash advance, whereas credit cards often charge big fees for a cash advance. Likewise, credit cards generally have a higher APR than lines of credit. Plus, you’ll almost always make monthly payments on your credit card, unlike the more flexible repayment schedule on a line of credit.
Unlike a business credit card or term loan, a business LOC works best for taking care of large(ish) short-term credit needs, like making payroll or taking care of surprise expenses—more on those and other uses in a minute. But first, let’s talk about why you’d want a business line of credit instead of a term loan.