What is a commercial line of credit?
- A commercial or business line of credit gives a company access to a pool of funds to draw from as needed.
- Typical uses include handling cash flow gaps, getting more working capital, and addressing emergencies.
- The company only has to repay pay what it withdraws, at the agreed interest rate and term.
Sample commercial line of credit programs
There is a wide variety of business line of credit programs, with maximum loan amounts ranging from $10,000 to over $1 million, and loan terms available from six months to five years. Collateral may or may not be required. As an illustration, we highlight below the four business line of credit programs offered by the U.S. Small Business Administration (SBA) under its “CAPLines” program:
- Working Capital: This is a revolving line of credit to cover general operating expenses, e.g., buying inventory and hiring more employees.
- Contract: This is for a company that need materials, supplies, or labor to meet their obligations under a contract or purchase order.
- Seasonal: This is for seasonal working capital needs, e.g., increases in inventory, accounts receivables, or higher labor costs as the company meets the demand of a busy season.
- Builders: This finances direct costs in constructing or renovating residential or commercial buildings for resale, including costs for labor, supplies, materials, equipment rental, and landscaping.
The maximum loan amount for all four SBA line of credit programs is $5 million, and the terms go up to ten years (except the Builders CAPline goes up to five years). The interest rate is tied to the prime rate (for example, for a line of credit seven years or longer and with a loan amount over $50,000, the rate is prime + 2.75%).
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