How Business Lines of Credit Work

If you’re looking for a flexible source of funding for your business, then a line of credit might be the right move. To help you decide, this article goes over the basics of how business lines of credit work and what you’ll need to do to apply for one.

The Basics of Business Lines of Credit

An easy way to understand business lines of credit is by thinking of them in comparison to loans. When a business takes out a loan, the business gains a lump sum of money that it must pay back to the lender, plus interest, on a monthly payment basis.

However, when a business obtains a line of credit, instead of a lump sum of money, the business gains access to a pool of funds from which it can withdraw money. For instance, if the line’s limit is $3,000, the business can choose to withdraw anywhere from $0 to $3,000. It will only need to pay back the amount withdrawn plus any applicable interest charges. As the business makes payments, the pool of money from which it can borrow replenishes.

Applying for a Business Line of Credit

Like loans, business lines of credit involve an application process. contributor Jessica Kent recommends first gathering the documentation you’ll need for your application. You will need basic information on your business—such as its name, contact information, and tax identification number—as well as financial data like revenue numbers and information on its bank account(s). After that, research different lenders to find the best fit, paying attention to factors like interest rates and fees.

If your application is successful, the bank will send an offer of a credit line. If the terms are acceptable, you’ll need to sign off on the bank’s documentation to access your funds. After that, congratulations: You can use this new funding source to help your business thrive!

For more information on financing and the business world in general, take a look at Commercial Capital Partners’ other blog posts.