How Does a Business Line of Credit Work?

Business Line of Credit

If you are running a company you have no doubt noticed that your day to day cash needs can fluctuate quite a bit. Having some flexible credit to deal with this issue can be very helpful, and one of the easiest ways to do this is to apply for a business line of credit. We will be discussing some of the details of how these work and what to expect in today’s article.

First we should discuss what you should not do with a business line of credit. If you are running at a loss and are trying to maintain your operations by borrowing to make up the difference, this isn’t a good use for your credit line, or any loan really. You should have a clear plan to pay back any money you borrow, and in the case of loans you should have a clear plan to turn the borrowed money into profit. Without this plan you are simply delaying the inevitable and you should consider how to improve your circumstances or cut your losses.

If however, you are simply trying to help yourself take care of month to month cash flow issues (payments go out for things but payments coming in from customers delayed) than a credit line can be a very powerful tool. One quick note before we get into have to obtain one is proper use. The most ideal situation is to borrow throughout the month, collect receipts from your customers and use those receipts to pay off what you owe within the grace period (typically 30 days). This means you will have all the flexibility that you need without paying any interest. This is not always possible of course, as not all customers will comply with the net/30 (no interest due if paid in 30 days) and will instead opt to pay the interest and pay in 60 or even 90 days. You should be able to use their interest to offset your line of credit however, and still be fine.

O.K. so how do you get one? Well this depends on a number of factors. If your goal is to look for a number of potential lenders very quickly you will probably be best served by starting your search online. A word of caution on this, make sure to check for a better business bureau report on any company you deal with, especially those you find online. It doesn’t cost much to put on really nice window dressing on a website backed by a less than reputable company, so be cautious. If you prefer to pare down your list a bit more methodically you may want to contact a local organization to help you find a lender. I highly recommend that you reach out the SBA chapter in your area if you decide to go this route.

Once you have your business line of credit remember it works much more like a credit card than a loan, you should attempt to pay it off in full each month whenever possible and never let the amount you owe slowly increase over time, if that’s happening you are misusing it and need to reevaluate your finances.

For more information, go to Business Line of Credit at

How Does a Business Line of Credit Work? was last modified: September 30th, 2011 by Amit Kraidman
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3 Responses to How Does a Business Line of Credit Work?

  1. Nancy says:

    Thanks for the share!

  2. Kelenna says:

    Hahhhaaa. I’m not too bright today. Great post!