Lines of Credit
A line of credit operates like a credit card. A financial institution grants you access to a specific amount of financing, but it's up to you when you want to draw on those funds and how much you want to draw. If a bank gives you a $100,000 line of credit, you can draw any sum up to $100,000. The best part is you only pay interest on what you use, and only start making payments when you've tapped into the funds. The benefits over a credit card are the lower rates and access to cash.
Just like credit cards, you'll often hear lines of credit be referred to as "revolving." This means you can use them again and again as long as your balance doesn't reach the maximum. Using the example above, if you do draw out $10,000 on that $100,000 line of credit, you can still draw out $90,000 when needed. Once you pay back that $10,000, you can draw the full $100,000.
You should apply for a line of credit before your business needs the cash. This a great business practice, as the best time to apply for any kind of credit is before you need it. Your financials are in better shape which will help you qualify for lower rates. Then, if your business faces a cash crunch, you have fast access to capital at solid rates.
You usually will get a line of credit with the bank your business checking account is at. This line of credit can serve as overdraft protection in case you ever unknowingly pull out more than is in the account.
The downside, of course, is that lines of credit can be particularly hard to qualify for, especially at the banks. Bank lending is at an all-time low to small businesses, so you'll need to be a financial rockstar to qualify. That being said, if you can get a bank line of credit, it is one of the best products out there.
There are a few online, alternative lenders who provide lines of credit. These lines of credit are usually collateralized by inventory or accounts receivable, so your business will need to be heavy in one or the other for this to be an option. These lines will have higher interest rates than the bank, but most likely lower than credit cards.
All in all, a line of credit is great for a business owner looking for a financial cushion and not a for a loan for a specific purpose.