What is a Commercial Line of Credit?

Sometimes referred to as an operating loan, a commercial line of credit is a type of business line of credit designed to allow companies to obtain cash whenever there is a pressing need for capital. Credit lines of this type are normally capped with a credit limit, with a specific rate of interest applied to the outstanding balance. While the interest rates on a commercial line of credit can be somewhat high, this financing strategy offers a couple of important benefits that many businesses find attractive.

One of the main advantages of a commercial line of credit is the ability to obtain capital without going through some type of qualification process each time money is needed in the short-term. This is different from situations in which an application for a new loan must be submitted in order to obtain funds. Since the credit line is pre-approved, the business can make use of the resource at will, often obtaining the necessary cash within minutes.

A commercial line of credit also offers the benefit of not having to receive the entire extended amount at one time, which means it is possible to effectively manage the interest that is charged on the balance. With a standard business loan, the debtor receives the full amount up front and interest charges begin immediately. In contrast, a company owes no interest when the credit line is not utilized. In fact, it is sometimes possible to avoid interest charges altogether, if the debtor borrows on the line and pays off that amount before the end of that same billing period.

Another benefit is the ability to manage the credit line to handle situations where cash is needed to pay pending debts. For example, if a major customer of a small business does not settle their account within the usual thirty-day period, that small business draws on its commercial line to credit to cover any debt obligations that are pending. Once that large invoice is settled, those funds are used to pay down the outstanding balance on the credit line, limiting the amount of interest that is assessed.

While a commercial line of credit is extremely useful in many business settings, this particular funding option may not be ideal for every company. Depending on the terms and conditions that come with the credit line, the management process may be somewhat time-intensive. In addition, the higher interest rates may be prohibitive, especially if a business plans on carrying a running balance for an extended period of time. Consulting with a financial expert will aid the business in identifying the best possible options for backup or emergency funding.