How Do Business Credit Lines Work?

Business Line of Credit

Sometimes your business may need a little extra cash for a few weeks or months. As the owner, you have a handful of options to meet those needs. You can bring cash into the business from your personal savings, look to outside investors, apply for a business loan, or access funds from a line of credit. Credit lines are an important part of many business models. Continue on to learn how they work, how to get one, and whether business credit lines makes sense for you.

What is a business credit line?

A credit line works like a credit card, but without the card. You can spend money from the credit line up to the credit limit, and you can pay it off in all at once or over time. At any time, you can again access the funds up to the account’s credit limit.

This type of account is called “revolving credit.” It gets the name because you can borrow and pay it off repeatedly as long as the account is open and in good standing.

How do business credit lines work?

When you open a business credit line, you will be given a credit limit. This is based on several factors including your credit worthiness, your business credit history, your personal and business assets, and your business’s financial performance.

Depending on your business structure and how you open the account, the payment history make be reflected on your personal credit report. Even if it does not show up on your personal credit, it is important for your business to always pay at least the minimum payment on time every month. Late payments can lead to expensive fees, and negative information on your credit report can lead to denied credit applications or higher interest rates in the future.

How to apply for a business credit line

You can apply at the bank you use for your business banking. Some banks have relationship requirements to open this type of account, but most often they are available to any qualifying applicant.

To apply, you will need your personal contact information, business contact information, a business employer ID number, and copies of your business’s financial reports. An income statement for the last full-year, most recent quarter, and a current balance sheet may be required among other documents. Some banks open lines of credit without a fee, but others charge an application fee to open this type of account.

Does a business credit line make sense for you?

Business credit lines are best for successful companies that have cash flow variability. If your business income is seasonal or irregular, a credit line could help you meet financial obligations until the next big check comes in. But remember, you have to pay interest on the funds you borrow until they are paid back.

If your business has more serious financial issues, a line of credit may only exacerbate the problem. If you are having financial trouble, will getting into debt really fix the problem? In some cases, where you need a new computer, machinery, or something else that can dramatically improve your business performance, borrowing could absolutely help solve the problem. However, if you are struggling, a credit line could just dig you deeper into a hole.

To summarize, for successful businesses that need additional capital temporarily, a credit line is a good option. For businesses that are struggling, lines of credit may just make the situation worse.

Focus on the Long-Term Bottom Line

A long-term financial plan and focus on the bottom line will help your business succeed. Don’t just look at a credit line as a lifeline, that’s like putting a band aid on a broken arm. It looks like it’s helping for a few minutes, but does nothing to solve the underlying problem.

If you create a long-term financial plan and stick to it, you’ll be on the path to success.