Small Business Line of Credit: A Simple Guide

by | Feb 20, 2023 | Business Finance, Business Line of Credit, Resources | 0 comments

Small Business Line of Credit: A Simple Guide

In today’s uncertain economy, many small businesses are experiencing cash flow problems. With high inflation and supply chain issues impacting companies nationwide, small business owners are simply looking for ways to make it through this downturn.

One solution that could help improve your business cash flow is called a business line of credit. It’s often easier to get this type of funding than a short-term loan or even an SBA loan. Plus, a line of credit offers the flexibility and funds that your company needs right now. This article will review some of the basics associated with a business line of credit.

Small Business Line of Credit: How it Works

Different from just a small business loan, a line of credit may be a good option for those seeking more flexible funding. Rather than just having a lump sum paid out upon closing, the line of credit is there when you require cash. You pay for what you draw. Interest does not start accumulating until you access your funds.

Businesses use these lines of credit to borrow on an as-needed basis instead of taking out a fixed-rate loan. The financial institution extending the LOC evaluates the market value, profitability, and risk taken on by the business and extends a line of credit based on that evaluation. The LOC may be unsecured or secured, depending on the preset borrowing limit and the evaluation results. As with almost all business lines of credit, the interest rate is variable.

Some of the benefits to business owners include:

  • Speed – You won’t need to wait for approval from the lender every time you need to make a purchase.
  • Flexibility – You can use it for nearly anything, like services, equipment, and inventory. As long as it’s a business expense.

Understanding Types of Business Lines of Credit

There are only two main types of business lines of credit – secured and unsecured. Still, it’s essential to understand their finer points before settling on the right one for you.

1. Secured Business Line of Credit

A secured business line of credit requires the borrower to provide a security interest in something of value, otherwise known as collateral, in order to obtain a loan. Traditionally, a secured line of credit is less of a risk for the lender, which often translates into potentially higher borrowing amounts and lowers interest rates.

2. Unsecured Business Line of Credit

As opposed to secured credit, unsecured credit is more of a risk to the lender since the borrower doesn’t have to put up any collateral to gain the loan. Because of the added risk to the lender, most lenders make underwriting decisions based on independent financial factors like credit score, credit history, and income. Because of these factors, an unsecured business line of credit may have higher interest rates and more stringent requirements.

Looking for a Line of Credit?

First Union Lending is here to help. We offer numerous financing programs, all designed with small businesses in mind. We want our clients to survive the economic downturn and thrive afterward.

Our business loans are fast and flexible—some applicants receive the cash in their accounts within two days. We understand that you need money now, not weeks or months from now. With products ranging from $5K to $1 million, we have the funds on hand to help. Call today!

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Only U.S.-Based Businesses are Eligible