A line of credit is unlike a merchant advance or term loan in that it revolves as you borrow and repay the funds. Simply put, if you have a $10,000 line of credit, you can borrow as little or as much as you would like from that $10,000 at any time you would like. As you pay off what you borrow, you free up that line of credit for future use. This can help you boost your business cash flow when needed.
If you are interested in obtaining a line of credit for your business, you can often choose between four main types of credit lines. Each one works a little differently from the next, and your bank likely offers all of them. Unlike merchant advances or private term loans, you may need to prove that you have a credit score of at least 600 in order to qualify. You may also need to open a business bank account in order to qualify for a business credit line.
The most difficult part of utilizing a line of credit wisely involves determining the situations in which it is best to use it. For the most part, because a line of credit is generally more expensive than a merchant advance or term loan, it is best used for smaller purchases and short-term needs. For example, if you want to buy $7000 worth of equipment, you could use your line of credit. Conversely, if you want to spend $50,000 on renovations, a merchant cash advance or term loan is the better solution since the repayment schedule is much more flexible and the interest is likely much lower.
Although a line of credit is not always the best way to make large purchases, it can certainly come in handy for smaller purchases, day-to-day transactions, and to make up for temporary shortcomings in revenue. Consider your credit and the risk involved before you settle on a line of credit for your business.
Advice and research for Canadian small businesses from our expert team