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How does a business line of credit work?
I just opened my own business about a year ago and now want to open a line of credit for it. How does it work? I believe we would be able to qualify because our balance is pretty stable. Am I correct in saying it works like a regular credit card? How does it differ from a credit card?
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3 Answers
It works similarly to a credit card and in most cases requires no monthly payments.
The amount your business is able to receive from a business line of credit will depend on your business past revenues and projected annual cash flow. A positive cash flow and the ability to demonstrate debt coverage will be required for approval. This means your business must in most cases to be profitable and able to repay debt on regular monthly payments.
Alternatively, most major credit card companies offer a variety of small business programs as well however if you aren't profitable / close to profitability, your presonal line of credit may be required to secure.
One key difference between a business line of credit and a credit card is the collateral that is required to open the line. Most business credit cards (for small businesses) have personal guarantees, meaning that it is really no different than personal credit card and the interest rate that they carry will be similar. The downside is that if the business has a problem you will be on the hook personally for the debts.
Ideally, with a business line of credit, the debt is backed by the assets of the business. There will be some work involved to document this for the bank, but if you take the time should be able to get a much lower interest rate than you would with a credit card. Once you have a track record with the bank you may even be able to avoid a personal guarantee.
Hi Randy.
It differs if you want to use the card for B2B e-purchasing. The card is then the key for the agreement between you and your supplier.
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