Why Small Businesses Use a Line of Credit

Why Small Businesses Use a Line of Credit

Often small businesses require access to funding so they can stabilize cash flow or spur further growth. An excellent solution in these situations is a line of credit. Here is some important information to help you consider whether this financing method is right for your company.

Line of Credit Basics

A business line of credit functions in a similar manner to a credit card. When you take out a loan, you receive a disbursement of one lump sum for which you have to make substantial monthly payments. When you are approved for a line of credit, though, the lender allows you access to a sum of money that you can draw on up to a predetermined limit. You pay interest on the funds that you borrow, and after you have paid it back, you once again have access to the same amount.

Different Types of Lines of Credit

Lines of credit may be either secured or unsecured. Secured lines of credit require a certificate of deposit or liens on assets. However, an unsecured line of credit does not require collateral.

Advantages of a Line of Credit

A line of credit provides you with short-term funding that you can access in times of need for any business-related purposes. For instance, if your cash flow falters, you can use your line of credit to cover the rent and other bills, pay the salaries of your personnel, and purchase equipment and inventory. If your business is seasonal, a line of credit can help you through the off-season. You can also draw on your line of credit in times of emergency or when unexpected opportunities for expansion arise. Using your line of credit wisely and paying off debt expediently can also improve your company’s credit rating, which can improve your chances of obtaining further funding such as loans in the future.

For more advice on business lines of credit, get in touch with Gipson Commercial Solutions.