A line of credit is an arrangement wherein a financial institution agrees to lend cash to a customer up to a specified limit. Generally arranged before the funds would be required, this option will provide a flexible solution for the customer which gives the ability to meet short-term cash whenever needed. This can also be called a bank line, revolver, credit line, open-end credit, revolving credit agreement.
With the interest expense charged on any drawn portion of the credit line, most borrowers incur expenses related to legal and document fees, some commitment fees paid to the lender during closing, and fees paid throughout the time of the facility on the average unused portion, often referred to as an unused fee. However, a fraction of the interest expense on the line will be the unused fee.
Moreover, a Business Line of Credit, is a common type of financing that is being offered by most business and consumer banks. It is a business capital that one can access any time but up to a certain amount contracted by the borrower and the lender to handle any expense. The borrower can repay and reuse this as needed also.
On the other hand, a small business credit card provides business owners with convenient access to a set credit limit of a revolving line of credit, for them to make purchases and withdraw their cash. Similar to a consumer credit card, it carries an interest charge if the balance won’t be paid in full for each billing cycle. Business owners may try to get a credit card through their bank or they can compare card terms and features to other financing institutions.
Small business credit cards are marketed as a good alternative to a traditional line, though they also have their differences.
The most obvious difference is that a credit card provides borrowers with a revolving credit line, and on the other hand, a line of credit is fixed. Meaning, one can continue to borrow or charge up to his credit limit as he uses a credit card to repay the monthly bill. Unlike a fixed credit line, applying for a new loan is necessary once he has used and repaid his previous loan.
With the lending guidelines being tightened down by the banks, business owners need access to working capital to grow their business. An option like a business line of credit can help business owners along the way.