A business line of credit works very much like a credit card. With an unsecured line of credit, a lender will provide you with access to money, up to a preset limit, that can be used for any type of business expense. Businesses often use lines of credit for operational expenses such as purchasing inventory, repairing equipment or machinery, or payroll.
Unlike a small business loan, you won’t receive a lump disbursement with set monthly payments. You will be required to make monthly or weekly payments only on the money you borrowed. Additionally, you will only pay interest on the amount of money you have borrowed from the line of credit. If you have a credit line of $50,000 and have only borrowed $10,000, you will not have to pay interest on the remaining $40,000.
Many lines of credit are unsecured meaning you do not need to put up collateral to borrow the money. For larger lines of credit, you may be required to secure the line of credit as a means of protection for your lender. Most unsecured lines of credit will come with a variable interest rate and will need to be renewed on an annual basis.