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A business line of credit loan provides revolving credit that can be used to deal with cash flow issues. This is a common financial product offered by most financial institutions. The lender authorizes borrowing on the line of credit up to a set amount, and the borrower can access funds up to that limit for any purpose. The loan is paid back at set intervals, as agreed, and the lender charges interest only on the amount owing on the line of credit.
A line of credit may also be called overdraft protection, since it can be used to make up for shortfalls in cash flow. It can also be used to provide working capital to keep a new business afloat until it starts generating enough income to have a steady source of income. For example, if a company is buying inventory for resale, the business line of credit loan can be used to pay for the merchandise until the company is able to recoup the cost when the items are sold. Once a payment has been made on the line of credit, the amount of available credit increases by the amount of the payment, less the interest paid.
An unsecured line of credit is available to business customers who can demonstrate that they are generating a positive cash flow and can afford to pay the loan. The lender will ask to see a cash flow statement, balance sheet and income statement as part of the loan application process. No collateral will be required for the business line of credit loan as long as the lender is satisfied that the business owner has a way to pay if the business alone does not generate enough income to do so.
In a case where an applicant's credit history is an issue, the bank may agree to set up a secured business line of credit loan. A house or other property may be used as collateral for the loan. Some lenders will allow a business owner to put up the cash value of a life insurance policy or investments like stocks and bonds for this purpose.
An advantage to entrepreneurs when opening a business line of credit loan is that it offers flexibility in repayment terms. In some cases, the borrower is only required to pay the interest owing on the outstanding balance each month. Other lenders require a set schedule for repayments, but the entire balance owing on the loan may be repaid at any time without penalty.