Business Line of Credit Loan Definition
Once a business starts operating, various financial needs arise in the form of expenses. Some of which may require the support of a business loan. A line of credit is fundamentally a type of loan. Businesses of small to medium size may also require external financial support when trying to expand or when they are trying to restructure. In today’s market, various types of loans are available for small business owners.
Usually, small business loans provide a lump sum of money that the borrower has to pay back with interest over time. Some of these loans are used to fund general business expenses; others are often used for working capital loans, real estate loans, inventory, or equipment financing. However, with a business line of credit loan, one can keep reusing and repaying the loan as often as the business needs as long as they make the payment on time and does not exceed the credit limit. Moreover, the line of credit borrowing limits is smaller than a term loan; thus, they are unsecured. Unsecured loans do not require collateral like an asset or inventory.
How Line of Credit Differ from Regular Loans
When looking for a loan, business owners seldom think of a line of credit as their first option. However, business line of credit loans offer more flexibility than a regular bank loan and gives the owner control of their financial decisions. Line of credit type of loan is available at financial institutions or banks. It operates somewhat like a credit card. Based on the specific plan a business owner is borrowing, he/she can borrow up to a particular amount and pay interest on the amount that is borrowed. He/she can then repay immediately or over the pre-specified period.
Like other loans, the credit line has to be approved by the bank or financial institution based on the borrower’s credit rating, general conduct as a business and as an individual. At many banks and financial institutions, the interest amount can be variable, making it less clear as to what the loan will end up costing. However, contemporary financial institutions like Equeduct have unique models like a subscription-model and offer interest-free loans, which help the business owner predict what the credit loan line will cost them.
Different Types of Credit Loans
There are three types of Credit Loans. Having an idea of what each credit type offers can help entrepreneurs decide what kind of credit loan is best for them and comprehend their creditworthiness for the loan of their choice. Following are three fundamental types of credit available:
It is a loan that is paid off in installments over a pre-specified period. Installments credits are prevalent in the form of home mortgages, student and car loans. For instance, if someone borrows $50,000 (principle amount) amount from a bank as a student loan or car loan and agrees to pay $1000 regularly or monthly over five years, the $1000 is the installment amount the borrower agrees to pay. In the end, the borrower will pay $60,000 for the car.
The amount of money the lender is charging is for the privilege of borrowing the money, which is the interest. Usually, on car loans, the interest is a fixed-rate. Though on other types of installment loans, such as home mortgages, it can vary over time. The borrower can save on interest by paying installment loans off early, but some banks and lenders have early payment penalties, which binds the borrower to pay the whole amount.
Off all types of loans, the revolving line of credit offers the borrower the highest amount of flexibility in terms of payment and purchase flexibility. In this type of loan, the lender issues credit or loan up to a specific amount, also known as a credit limit. The borrower can keep borrowing money without the hassle of reapplication as long as the total amount is within their assigned credit limit. Even if the business owner borrows the full amount, he/she can use the fund as soon as the borrower’s previous debt amount is fully repaid. According to Investopedia, the credit limit is relevant to the business/borrower’s credit score, income, or credit history. Credit cards are a notable and frequently used example of a revolving line of credit.
A revolving line of credit remains accessible for the business. The borrower gets to use the fund repeatedly, as long as the business maintains its good standing in terms of qualification or runs out of credit limit. But for installment credit, the relationship or deal closes once the principle and interests are repaid. For example, if someone has a credit card with a $1000 limit and has to pay $600 on it throughout the pre-specified repayment time/billing period. Another $400 is available as credit for the lifetime of the card for the borrower to use.
As long as the business owner borrowing makes required payments, he/she will continue to have credit available to use. The amount of accessible credit is based on the outstanding balance after the company owner repays his/her choice. The borrower has to only pay the interest incurred on the outstanding balance.
This is a blend of a revolving line of credit and installment credits. For open credits, the amount to be paid back can vary every billing cycle/month. It can also fluctuate depending on spending pattern, credit history, payment history, and other factors. To continue to use the credit, the business owner has to repay the full amount he/she owes to the bank. The most common examples are utility accounts or cards like gas, electricity, and water.
Why Equeduct Revolving Line of Credit is Good for Your Business
Equeduct revolving line of credit provides the small business owners with flexibility, control of financial decisions, and transparency. The line of credit offers a specific amount of working capital that borrowers can use anytime the business needs it. Equeduct plans offer a 0% interest revolving line of credit for a small fixed subscription fee. This allows the borrowers to plan finances better as they can estimate the amount they will owe. Having a fund ready to finance everyday business needs helps business owners sustain and grow their business despite roadblocks. Especially in a post-pandemic world, businesses can benefit greatly from a flexible source of funding to manage their shaken finances.
Small business can use Revolving Line of Credit to:
- Reopen & vitalize your business
- Cover payroll, rent, & inventory needs
- Manage recurring expenses
- Establish rainy day capital for peace of mind