This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.

A business line of credit offers businesses the flexibility to access funds as needed to help meet their financial goals. For business owners and entrepreneurs, a business line of credit can help keep their business running smoothly day-to-day, despite potential ups and downs of sales, seasonal changes, or occasional cash flow shortages.

What is a business line of credit?

A business line of credit is a flexible financing tool that could help a small business grow or address cash flow shortages. With a line of credit, a borrower can draw funds as needed from their credit line up to the available line amount, and only pay interest or loan fees on the amount borrowed.

The credit line – or the maximum amount a borrower is approved for – and the repayment terms are determined by the lender.

A line of credit can enable a business to pursue opportunities even when the business owner may not otherwise have the cash available to invest. The specific rates and policies governing lines of credit can differ across lenders, but many business lines of credit share some common characteristics and purposes.

How does a business line of credit work?

Much like a credit card, a business line of credit allows a borrower to draw funds from their line repeatedly up to the available line amount without having to reapply each time. Unlike most credit cards, a business line of credit typically does not have an interest free repayment period.

While most small business loans require an individual to borrow a fixed amount upfront and repay it over a predetermined amount of time, a business line of credit may be more flexible. With some lenders, the line of credit is replenished as a borrower repays the funds, so long as the borrower remains in good standing with their lender.

Although terms will vary, borrowers usually pay back a business line of credit’s outstanding balance on a weekly or monthly basis.

Secured vs. unsecured loans

Small business lenders might offer secured and unsecured forms of funding.

Secured financing requires borrowers to provide some type of collateral, such as inventory or another type of asset. Unsecured financing does not, though lenders may still ask borrowers to provide other forms of protection for the lender, such as a personal guarantee of the loan by the individual representing the business.

Understanding the different options for a small business line of credit and what lenders may require for a borrower to qualify will help business owners make informed decisions for their small business.

What’s needed to apply for a business line of credit

When comparing options for a business line of credit, it’s important to check lenders’ eligibility requirements before applying. Some lenders, for example, may require borrowers to agree to personally guarantee the funds drawn on a line of credit or meet a certain credit score.

Once a business owner has decided on the lender they would like to apply for a line of credit with, they can move forward. Information that may be requested includes:

• Business details, such as the name, location, and type of business entity
• Business records and business financial information
• Contact details for the business
• The borrower’s personal information, such as their name, contact details, etc.

After submitting the required documents and information, the lender will assess the application and inform the borrower whether they’ve been approved, and how much funding they can access.

Fees associated with a line of credit

Borrowers may also need to pay fees to open and maintain a line of credit. Examples of fees include:

• Application or origination fee: This amount may be a flat fee, or a percentage charged for a lender to process an application.
• Draw fee: This is a charge paid each time a loan is drawn on the line of credit.
• Maintenance fee: Some lenders charge an annual or monthly fee for a borrower to keep their line of credit active.
• Inactivity fee: If a line of credit is not accessed and a loan not drawn for a certain amount of time, the borrower may be charged a fee.

How to use a business line of credit

There are many ways that small businesses could use a business line of credit. While a business line of credit is a great option to help small businesses navigate cash flow gaps or address unexpected financing needs, they can also be used during times of growth. Here are six possible uses for a line of credit.

1. Jumping on growth opportunities
   
   Small business owners might have ideas or opportunities for growth without the necessary capital to pursue them. One purpose of a business line of credit is to help capitalize on those opportunities.
   
   Business owners could use a business line of credit to fund new opportunities, such as opening a new location, launching a new product line, or funding a new marketing campaign. When an entrepreneur has a line of credit available, they have access to draw the funds they need to act on those promising ideas or opportunities that come their way.
   
   
2. Managing cash flow shortages
   
   Many small businesses face cash flow shortages from time to time. Cash flow may become tighter due to seasonal business trends or a business emergency. A business line of credit presents a potential way to access funds needed to manage through a cash flow crunch.
   
   
3. Paying for seasonal inventory
   
   Purchasing inventory or supplies for an upcoming season could be expensive. In many cases, it might be months before the business experiences the payoff from their investment. However, without the right inventory, the business will miss out on sales.
   
   Covering inventory expenses can be a valuable use of a business line of credit. With a line of credit in place, a business owner has access to the funds available to cover inventory costs when they need to place an order.
   
   
4. Helping out with unexpected repairs
   
   As a small business owner, it’s not uncommon to face unexpected costs for repairs to equipment or facilities. For example, when a company vehicle or computer breaks down, repairs are necessary to keep the business going. But repairs can be costly — and that’s another use for a business line of credit. The funds from a line of credit can help relieve cash flow pressure.
   
   
5. Buying equipment
   
   Having the right equipment can play an important role in growing or expanding a small business. When the owner has a business line of credit, they can be prepared to withdraw the funds needed to purchase software, machinery, computers, or other equipment to help keep their business moving forward.
   
   
6. Repaying vendors
   
   When a business is growing, it’s not uncommon to experience periods of negative cash flow. However, if a business is experiencing negative cash flow, it can be difficult to pay vendors on time. Funds drawn from a line of credit could be used to cover bills from vendors and may be a way to get through a temporary cash flow shortfall.

How could a line of credit help a business?

A line of credit can help a business owner meet short-term cash needs, such as purchasing supplies or additional inventory, or covering day-to-day expenses. The loan funds from a line of credit could also help a business owner jump on timely business opportunities, increase marketing or advertising spend, or expand their products or services.

Consider an American Express^® Business Line of Credit

The American Express^® Business Line of Credit offers flexible access to funding that can help business owners manage their cash flow and cover unexpected expenses, so they can focus on growing their business.

Note that the American Express^® Business Line of Credit may have different eligibility criteria, terms, and features from the lending products that are discussed above. With Business Line of Credit, all loans are secured by business assets.

To learn more about an American Express^® Business Line of Credit, click here.

Frequently Asked Questions

Below are answers to common questions about using a line of credit for a small business.

What’s the difference between a business line of credit and a loan?

Understanding the difference between a line of credit and a small business loan can help a borrower determine which may be a better option for their business. A business line of credit allows a borrower to draw from their line on multiple occasions, up to their approved credit limit. Borrowers do not have to reapply with their lender each time they draw from their line of credit. Typically, interest is charged only on the funds that have been withdrawn, not the entire available line size. Other fees may apply to a line of credit, such as a maintenance fee or an inactivity fee.

Business term loans provide a lump sum upfront that borrowers must repay over time. For a borrower to receive additional funds, they may have to apply for another business loan.

How are a business line of credit and a credit card different?

At a high level, both a line of credit and a credit card essentially lend you money and require you to pay it back with interest. Both a line of credit and a credit card require borrowers to pay interest only on the amount of funds they take from their line. As these funds are repaid, room within the credit limit is freed up for new borrowing, making both lending types revolving in nature.

Unlike most credit cards, a business line of credit does not have an interest free repayment period. While credit lines could have higher credit limits, borrowers may be able to earn cash back or rewards when using business credit cards.

Are there exceptions to what a business line of credit can be used for?

Like other types of business loans, there may be limits on how borrowers can use a business line of credit. Lenders may have different guidelines governing the use of the funds.

For example, some lenders may not allow borrowers to use funds from a business line of credit for long-term debt payments or capital expenditures, while others may. Before opening a business line of credit, it’s a good idea to check with potential lenders to find out about any limits on using the associated loan funds.

The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.