How Does A Line Of Credit Work?
If your business qualifies for a line of credit the lender will approve a loan amount which you can use at any time and for any purpose up to its maximum limit.
You are only charged interest on the funds you draw.
If the facility is a revolving line of credit, you can use it as often as you like as long as you have replenished the funds you borrowed and paid your fees.
The interest rate is normally variable.
Lines of credit can be secured or unsecured. The latter are slightly more expensive because the risk of loss to the lender is perceived to be higher.
A line of credit is most commonly used to smooth out the cash flow bumps faced by every business and to fund projects where it’s difficult to know how much is needed in advance.
It can also be used as a backstop for when the overdraft is fully drawn or emergency funds are required to meet a business need such as a tax payment.
The interest on a line of credit is pricier than a standard loan secured by mortgage or vehicle, but it’s generally much better than a credit card.
Some, but not all lenders, will charge account fees even if you don’t use the facility.