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Not only is a business line of credit idea usually a good idea, but it is also actually almost necessary for most small and medium-sized businesses. Just consider, for example, the ongoing Coronavirus Pandemic; businesses that were able to use a line of credit to meet payroll and expenses were/can outcompete those that weren’t.

What Does a Business Line of Credit Enable?

It lets you borrow money for emergencies, and only be responsible for the interest on the amount you borrow – your credit limit is the cap for the total amount you can borrow in this scenario. The fixed level of cash allows you to keep your suppliers paid and supplies incoming, meet payroll requirements and other business expenses.

The chief advantage, however, is the ability to borrow more money without the need to go through another application process. The specific options are myriad: you can obtain an unsecured line of business credit, or a secured line (in the latter, your assets may be in jeopardy if you default on the loan). Additionally, even for the unsecured option, you’ll be liable for maintenance and administration fees – such as, in the latter, the origination fee.

Choosing Wisely: Business Loan vs. Business Line of Credit

Let us first analyze the business loan, shortly. The best scenario in which this is usually optimal is when you know precisely what the money is for. For example, if you want to finance equipment or a business acquisition, then a business loan often fares better. You receive all the funds you need in one go and are responsible for paying it off according to the terms.

On the other hand, if you have some business expenditures and/or wish to hedge against a looming economic downturn (for whatever reason), then a business line of credit fares much better than an outright loan. The revolving door of credit offers you many more options. You can also receive the funds you need in a day or so.