A small business line of credit is a financial tool that has much in common with a business credit card. Unlike a term loan, a small business line of credit does not provide a lump sum of cash that requires a monthly repayment schedule. Instead, it offers the borrower access to capital up to a certain amount. Similar to using a business credit card, you can access the capital as you need it to pay for business expenses. The balance on a line of credit is “revolving,” meaning that you can carry the balance from month to month and interest is calculated based on the amount you draw. As you repay that amount (called the “principal”), your available credit goes back up to your limit, allowing you to replenish your credit and use it again.
When small business owners start looking for funding, many start their search by researching term loans and business lines of credit. One key difference between those two options is that a business line of credit is flexible in ways a term business loan is not. With a business line of credit, you could borrow an amount up to your credit limit, and you would pay interest on the amount that you borrowed. Fees vary depending on the lender and the precise line of credit you choose; look out for inactivity fees, and other additional fees. The main constraint of a line of credit is that you cannot go above and beyond your credit limit.