A business line of credit provides your company access to short-term funding that can be used for business expenses as they arise. Because expenses may remain steady throughout the year while incoming cash can fluctuate, many businesses use a line of credit to help ease seasonal cash flow issues or business cycles and cover short-term operating expenses.
Unlike a business loan, there is no lump-sum disbursement of funds, and the loan is not designated for a specific purpose. Your bank approves a maximum credit amount, and your business can draw funds against the maximum limit to use as needed.
How a Business Line of Credit Works
When your business is approved for a line of credit, your bank will advise you as to the maximum line of credit your business qualifies for. As funds are needed, your business can draw against the line of credit at any time, usually by writing a check from a business checking account or using a business credit card or mobile banking app. The portion drawn is considered a loan.
Once you borrow funds from the line of credit, interest on the loan begins to accumulate on the amount borrowed. Interest rates for a business line of credit are often lower than the rates for business credit card purchases or cash advances.
Funds borrowed from the line of credit reduce the amount of credit available. As you repay the borrowed amount, the balance becomes available to borrow again. You do not need to apply for another line of credit.
Collateral for a business line of credit most typically consists of a priority lien on all assets of the business. If you fail to repay the loan as agreed, the lender can claim the collateral.
What Else You Should Know
When taking an application for a business line of credit, lenders typically require documentation that can include personal and business tax returns, bank account information, and business financial statements such as profit-and-loss statements and a balance sheet.
Business lines of credit are subject to credit review and approval and an annual renewal.
The terms of your agreement will specify when payments are due, and the payments can fluctuate based on the amount borrowed. Interest payments on the outstanding loan balance are due monthly while the principal balance itself is typically due on demand.
Business lines of credit usually have variable interest rates and missing a payment could cause the interest rate on the line of credit to rise.
To learn more about business loans provided by Enterprise Bank, including Business Lines of Credit, visit https://www.enterprisebanking.com/business/loans/commercial-loans or contact us at 877-671-2265.