How Does A Small Business Line Of Credit Work?

Small businesses need access to financing for a variety of reasons. Opening a new shop or office, purchasing inventory, and making payroll are just a few ways that cash can be tight. A small business loan could help cover the short-term needs with items like a home equity line of credit (HELOC), but there are also other options to consider. A small business line of credit works as a revolving account where the funds can be accessed when needed.

Small Business Line of Credit: Meaning

A small business line of credit is an unsecured revolving loan that includes both a maximum and minimum amount that can be borrowed. The total amount available will depend on the bank and the availability of funds in the account at any given time. These funds are released on demand and work like a credit card or home equity line of credit. This means that the borrower can access the money at any time and pay it back as needed.

With a small business line of credit, the funds are often based on current income. This is because the bank will be waiting for payment until it is received. Often, this type of financing is not available for startups or companies that have not made any money yet.

Small Business Line of Credit: Benefits

A small business line of credit can be very handy for small businesses. With quick access to funds, the borrower can make purchases or pay off debt with little concern about the balance on the account. A small business could use a line of credit in conjunction with a home equity loan to cover three-month payroll needs. Smaller business loans can be used to cover payroll without a cosigner and payday lenders charge interest rates of over 20%.

A small business line of credit can provide flexibility in cash flow, especially if the company has an irregular amount of income. This is especially helpful for new companies, as it can cover expenses that may not be part of the typical budget for a startup.

While a small business line of credit can be helpful, it is important to note things carefully. For example, many banks have minimum payments, even if there is no balance on the account.


A small business line of credit is an agreement with a bank where the funds are available to borrow up to the agreed-upon amount. The account is under the control of the business owner and is similar to how a credit card works. A billing cycle is set up where a minimum payment is required by the due date each month. Any money borrowed can be used for whatever purpose needed, such as payroll or for inventory, but must be paid back within a specified period.

If a small business needs financing, consider looking into the use of a small business line of credit. These can be useful for small businesses to cover short-term needs and allow consumers to manage their finances more efficiently.

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