A business line-of-credit (LOC) has more in common with a business credit card than it does with a business term loan.
Like a business loan, a line-of-credit provides a business with immediate access to money that can be used to address any business expense that arises. Unlike a business loan, however, there’s no lump-sum disbursement made at account opening that requires a subsequent monthly payment.
A business line-of-credit is subject to credit review and annual renewal, and is revolving, like a credit card. That means interest begins to accumulate once you draw funds, and the amount you pay (except for interest) is again available to be borrowed as you pay down your balance. As with a credit card, the lender will set a limit on the amount you may borrow.
Why would I need a line-of-credit?
The primary reason to open a business line-of-credit is to gain immediate access to short-term funding. Most businesses use these funds to support financing for operational expenses like supplies and payroll or for increasing inventory. Cyclical businesses often rely on an unsecured line of credit as a source of off-season working capital.
Unlike many small business loans, a business line-of-credit not designated for a specific purpose or purchase. Because of that, they are a good choice for small businesses looking for ways to better manage cash flow.
Secured or unsecured?
A business line of credit is typically offered as unsecured debt, which means you don't need to put up collateral (assets that the lender can sell if you default on the debt). Many unsecured lines of credit come with variable interest rates and are available in a wide range of sums.
For amounts greater than $100,000, you may be required to secure your line of credit with a blanket lien on your assets or a certificate of deposit.
Because lines-of-credit are unsecured, they often come with higher interest rates than traditional term loans.