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While business loans are used to finance capital for a business, such as buildings, technology, contractors and other forms of infrastructure, business lines of credit can be used to service short-term capital needs such as inventory purchases and operating expenses. A business line of credit operates like a credit card; credit is given out to qualifying candidates with fixed limit, and purchases made on the line of credit are charged interest. Unlike a business loan, interest is only charged on the money spent rather than the lump sum, making them more flexible. Business lines of credit are considered revolving credit, meaning that interest is charged as a market-determined adjustable percentage of the loan with no term. Lines of credit are most often used for businesses with seasonal operating expenses, or other expenses that the business covers over duration of the whole business cycle, rather than as a steady flow.
In order to qualify for a business line of credit, you usually first have to have established credit with the Small Business Financial Exchange (SBFE). This is the same process that you would use to qualify for a business credit card: the business must be registered with an Employer Identification Number (EIN), have its own bank account and telephone line, all necessary licenses and permits, and the business must also be registered with the business credit reporting companies. You need then to show profitability and stability.
The banks issuing the line of credit will need to examine your business’ cash flow in order to determine whether and for how much you qualify. The business must have both demonstrated a positive cash flow in the past, and must reasonably project a continued positive cash flow in the future.
Like homeowner’s lines of credit, you can get a business line of credit from banks. Banks offer competitive rates that are usually very similar to the rates the business credit card companies offer. You may want to consult a broker, who will be able to provide you with a better product than your would find shopping for a business line of credit from banks directly.