A small business line of credit is a financing tool offered by most banks and commercial lenders that is designed to help small businesses cover a temporary need for working capital. Popular uses for this method of financing include: covering temporary cash shortfalls or unforeseen operating expenses, increasing equipment inventory, smoothing out seasonal cash flow, or taking advantage of unexpected opportunities to expand the business.

A small business line of credit is usually a revolving line of credit. Like a credit card, it has no fixed terms of payment and is based on an adjustable market-based interest rate. Many business lines of credit allow for monthly interest-only payments, and in most cases the business can opt to pay the full principal amount plus interest at any time without penalty.

The amount your small business is able to receive from a business line of credit will depend on your business’ past revenues and projected annual cash flow. For approval, most lenders require that businesses demonstrate a positive cash flow and the ability to cover debt.

To see if a business line of credit would be appropiate for your small business, here are some of its pros and cons:

Pros

• Quick access to capital that can grow as your business grows

• No collateral necessary

• Helps small businesses manage their cashflow

• You only pay interest on the money you use from your credit line

• The money can be used for anything; no business plan necessary!

Cons

• Needs a good credit score

• Only available in small amounts- usually not more than $100,000

• Approval is dependant on past revenues and projected annual cash flow

• There is a temptation to use the credit without a concete plan for repayment