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Line of Credit: How Does it Work?

Posted On: June 11, 2020 author Paul Kendall

The line of credit is one of the most useful financing solutions business owners can access. Unfortunately, a lot of business owners still don’t know how it works.

For example, a lot of people don’t even know that instant approval business line of credit is possible. They think a line of credit always involves a lengthy application process.

Today, we’ll clear up some of the misconceptions about the line of credit. We’ll go over how it works, when you should use it, and what you can expect when it comes to the terms.

You’ll also learn how best to get instant approval business line of credit. In the process, you should discover all you need to know about using a line of credit for your business.

How Does Line of Credit Work

 

The first thing to know about a line of credit is that it’s not like a conventional loan. With a conventional loan, you get the borrowed amount after approval, then repay it in fixed installments. 

In contrast to that, a line of credit establishes a preset borrowing limit. You can draw on the line of credit or borrow from the lender up to that limit as needed.

You also only pay interest on the amount you actually borrow. The repayment terms will vary from lender to lender, but generally speaking, you can continue to borrow as long as either of these is true:

  • You don’t hit the credit limit, or 
  • Pay back the amount owed once you do hit the credit limit.

 

Typically you will pay back a minimum monthly payment amount back on the line of credit much like a business credit card. Some lenders will give you a monthly payment based on a percentage of your outstanding limit. The beautiful thing about a line of credit for your business is that you only pay interest on the money you're using and not the entire approval amount and when you go to pay it off you only have to pay back the remaining principal amount much like a business credit card. 

Now, based on this, you can probably guess that a line of credit is used in a way that differs from traditional loans. In fact, let’s take that up next -- when or how to use a line of credit.

 

When to Use a Line of Credit

 

When should you use a line of credit? Well, a simple way to go about it is to follow the rule that a line of credit is not meant to fund one-time purchases such as a house or car. 

Instead, use a line of credit to get items that lenders like banks would not normally approve for a loan. 

A line of credit can also be used to smooth out monthly income and expenses. For business owners, they’re often used to finance projects for which it is difficult to ascertain the exact funds needed in advance. 

Line of Credit How Does it Work - business credit

The Rates of a Line of Credit

 

Of course, the rates you get for your line of credit may well affect how you use the line of credit too. Better rates tend to encourage borrowers to use credit lines more often, after all.

There are several factors that affect the rates of lines of credit. These include your credit history, loan features, business characteristics, and the interest rates in the broader economy. 

And naturally, the choice of lender may determine the rate you get. But usually, the rates on credit lines range from 7% to 25%. 

 

Line of Credit Terms

 

Now what about the terms? This varies again from case to case and from lender to lender, but you can generally access between $10,000 to over $1 million with a line of credit. 

As for the repayment terms, they will often be between six months and five years. This will depend on your creditworthiness. 

There’s also typically no prepayment penalty should you pay back the funds early. However, depending on the lender, you might face draw fees, inactivity fees, and/or withdrawal minimums. 

Some line of credit terms work like a credit card and you just make a minimum monthly payment. Some line of credit terms you get a monthly payment amount that's a percentage of your outstanding balance. 

How to Get an Instant Approval Business Line of Credit

 

In any case, you now know how a line of credit works and when to use it. Next, we need to talk about how to get instant approval business line of credit.

As you may have guessed from what we’ve already covered, good credit history is one of the things that can get you an instant approval business line of credit. 

In that sense, getting instant approval business line of credit is much like getting fast approval for conventional loans. Credit scores play a big part in both.

Having a good financial expert to help you with the application for a business line of credit may also help you speed up the process. Such experts know what most lenders look for in order to grant instant approval business line of credit.

Note that qualifier, by the way -- “most business lenders”. This is because, as stated earlier, different lenders may have different terms as well as requirements for a line of credit.

As such, it only follows that different business lenders may sometimes seek different things for instant approval business line of credit.

Line of Credit How Does it Work - business line of credit

Further Tips on Getting a Line of Credit

 

There are a lot of other things you can do to improve your chances of getting an instant approval business line of credit. 

You may have already gathered it from our earlier discussion, but lines of credit vary a lot across lenders. That’s why you shouldn’t just settle for the first one you find that has a possibility of instant approval or fast approval.

Look for one whose qualified borrower profile fits you and whose terms are ones that would benefit your business.

For example, say you need something that won’t charge you for pre-paying, because you’re confident you can repay the credit quickly and want to do that.

Then let’s say you also need something with an auto-replenishing credit line. And that you want as little paperwork as possible.

If that’s the case, look for instant approval business line of credit options like Trust Capital’s Line of Credit program. Not only does it meet those requirements but it also only requires you to pay interest only on capital you actually use.

Moreover, it affords businesses the ability to increase credit lines at 30% into their payback terms. That’s aside from offering them a flexible weekly repayment schedule.

The long and short of it is, you want to make sure the terms actually work for your business. 

That’s why it pays to take a close look at all the details when choosing instant approval business line of credit options.

Final Thoughts on Getting Instant Approval Business Line of Credit

 

Today, we talked about the line of credit, what it is, when to use it, and how to boost your chances of getting an instant approval business line of credit.

A line of credit is a useful credit facility that allows business owners to get additional funds on an as-needed basis. Usually, lines of credit are used to help business owners better manage their running expenses.

Lines of credit are more similar to credit cards than traditional loans, in that sense. However, like traditional loans, they also have requirements for approval.

Different lenders have different requirements, especially for instant approval business line of credit. The ones we mentioned here, like a good credit score, tend to be applicable to most lenders and lines of credit, though.

In any case, now that you know more about the line of credit, you may want to discuss your options for it with a reputable lender. If so, contact Trust Capital, where you may also be able to get instant approval business line of credit.

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