This concept is similar to paying using a credit card. There’s a capping beyond which you cannot take credit, and you need to repay the amount within a specified period. The same thing happens with a business line of credit. The lender allots a sum of money for your business from which you can keep spending until you reach the maximum amount. You need to repay the money with interest later. A business line of credit is useful for financing short-term capital requirements, like easing up cashflow, financing marketing campaigns, repairing machines, or purchasing inventory.
Types of business line of credit
There are two types of business line of credit that you can apply for: secured and unsecured.
1. Secured line of credit
A secured line of credit requires you to keep a part of your asset as collateral for the loan you are taking. This type of credit is usually a short-term liability. And so, lenders mostly ask for short-term assets, like inventory or accounts receivable. You don’t need to keep an expensive machine or property as collateral.
2. Unsecured line of credit
An unsecured line of credit doesn’t require you to keep any asset as collateral. But you will have to provide a personal guarantee or general lien to secure the loan. Since this type of loan doesn’t involve any collateral, lenders usually approve the loan to those with a strong credit profile.
How does this loan work?
Once you apply for a business line of credit, your business will receive access to the amount of loan you want to take. For example, if you need $1000, the lender will allocate that amount to your business. Then, you can borrow money up to that amount whenever you want within the specified date.
You also need to repay the loan as per the pre-decided agreement. Suppose you take out the loan for three months. You must make sure that you repay the amount you use, along with interest, within that period. If you use $676 out of $1000, you have to repay $676, plus the interest, within three months. Most lenders allow weekly, monthly, or periodic repayments.
Q: How do I apply for a business line of credit?
A: Online lenders usually don’t require a lot of documentation as traditional lenders like banks to approve a business line of credit. You may have to provide the following information to approve the loan:
- Your business license
- Your business’s bank account
- Two or three months of bank statements
- Tax returns
- A few financial documents like cash flow, AP, AR, or profit and loss statement
Blursoft is one of the most reliable online lenders that offer a business line of credit. You can apply for the credit by emailing them your details to email@example.com or filling out their contact form.