When you find yourself in need of capital, the most appropriate form of capital is not always obvious.  Some small businesses may be able to tap into the resources of a family member or friend, or perhaps the available balance of an existing credit card.  Or if a larger amount is required, a traditional term loan from a bank may be a better option.  But what if you have a long-term project coming up, and need ongoing financing?  One flexible solution to the need for ongoing financing or financing during a period of increased expenses is a line of credit.

How It Works

A line of credit is like a hybrid between a traditional loan and a credit card.  Once approved, you have a maximum credit limit against which you can draw over the course of the loan term.  After you draw funds from the credit line, you then make monthly payments similar to making payments for a credit card bill.  Those payments then increase the amount of capital available against the credit line.  At some point in the latter part of the term, you will no longer be permitted to draw against the credit line, and instead will be required to pay off the remaining balance over the remaining term of the credit line.

When to Consider It

A line of credit can be a great alternative to a term loan or credit card when there is an ongoing need for capital.  Whether you are hit with unexpected repairs or renovations to your business, or you are planning a marketing and advertising campaign on short notice, the credit line can be a convenient and quick way to pay for such planned or unplanned expenses.

And because you only draw the funds needed, you avoid having to pay interest on funds you do not need at that moment, unlike a tradition term loan.  This type of capital can often be approved in as little as a few business days, and you will also typically find interest rates much lower than a credit card.

As with any type of capital requirement, you will need to do your research.  For example, what expenses do you know that you will need to account for when applying for a line of credit?  And when requesting a specific credit line limit, are you able to estimate those potential unforeseen expenses as well?  If you need access to capital over an extended period of time and desire the flexibility of only drawing the funds you actually need at a given time, then a line of credit is probably a good option to solve your capital requirement needs.