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Business Line of Credit—What is It?

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This is a financial borrowing agreement between the bank or other financial institution and the business.  Many times a business will use this type of credit for unexpected expenses, buying seasonal inventory, to expand their business, buy new equipment, and more.  The terms and how large the line of credit will be will vary according to the success and size of the business, current financial market, and regulations of the bank.

There are many different reasons why having a business line of credit can be an asset to the business.  For example, if a business wants to expand their operations or purchase new equipment to manufacture a new product, a business line of credit will allow the business to pay for the construction of a new building or production lines, and cover any expenses before the expansion or new production line is completed.  For those businesses that are considered seasonal like shops that sell swimsuits or other summer items, it will help them pay expenses during the off season when business is slow.

For most business lines of credit they are considered unsecured.  This means that the business does not have to have any collateral to get the line of credit.  This helps if the business does not have enough collateral to cover regular business loans or do not want to put up personal or business property to get a loan and risk losing it if they cannot repay the loan.  The terms of the business line of credit may be determined by the revenue success of the business.  The revenue success of the business can also determine the amount of the line of credit.

This type of credit is very different from a loan in regards to the repayment options.  With business loans Sydney, the money will be given in a lump sum with the borrower being responsible for making monthly payments until the load is paid off, generally within a certain time.  With a business line of credit it is considered a revolving loan and is available for the business to withdraw from in any amount that is needed up to the maximum amount on the line of credit.  The business is then only responsible each month to repay the amount that has been borrowed.  On business loans the interest rates can be flexible or fixed but with a line of credit the interest rates will vary depending on the market, meaning they are flexible.  In addition, with business loans you have to apply for new ones but with business lines of credit you just have to renew them on the date specified.

There are also downsides to having a business line of credit, which can include:

  • There may be fees for withdrawing funds from the line of credit
  • Charges for all transactions such as paying bills
  • Early repayment penalties
  • Large late charges if not paid on due date
  • Interest rates can be very high if there is a big shift in the economy making the repayment higher

 

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