A business line of credit is a financial safety net for your business. It’s also one of the most flexible forms of financing. You can use it for buying equipment, hiring staff, increasing inventory, adding a second location, paying invoices, installing a cappuccino machine, and more.

And because a line of credit is revolving, you can use it as many times as you want. As soon as you repay what you’ve used, those funds become available to you again.

Qualifying and applying for your line of credit is pretty easy.

To get your business line of credit, you’ll typically need to be in business at least 6 months and have $50,000 or more in annual revenue. You’ll also need a credit score of 560 or higher.

Your lender may ask you to make a personal guarantee, which is an agreement that the lender may be able to levy personal assets such as a car, house, or bank account if you default on the line of credit.

One of the coolest things about a business line of credit is that you only pay interest on the funds you use, not the full amount. For example, if you’re approved for a $40,000 business line of credit and you use $20,000 for office upgrades, you’ll just pay interest on that $20,000. This could save you a bundle in interest.

Business lines of credit may be secured or unsecured, and either closed or revolving. As with a secured installment loan, a secured line of credit requires collateral. Unsecured lines of credit are approved based on your personal and business finances and creditworthiness.

With a closed line of credit, your credit limit is the maximum you can borrow in total and funds are dispersed to you at the start of the loan. Revolving lines of credit let you pay down and borrow against your credit limit multiple times, similar to a credit card.

An unsecured revolving line of credit works by letting you borrow money as you need it. You can draw as little as your account’s minimum draw requirement (such as $500), and up to your approved credit limit. You won’t have to pay interest on the unused portion of your line of credit.

When you take a draw, the funds will be electronically transferred to your bank account. You’ll then repay the draw with periodic daily, weekly or monthly payments over a specific repayment term, such as six or 12 months.

You can use your business lines of credit for almost any business need. Common uses include covering operating costs during a slow season, paying for recurring expenses and preparing for a new project. A line of credit can also help with emergency expenses, as you can request a draw without having to apply for a new loan.

Any business may be able to benefit from a line of credit if it has regular, short-term financing needs or is making ongoing payments for a large project. Companies that regularly face cash-flow crunches, such as manufacturing, wholesale, construction and medical businesses could use a line of credit to smooth their cash flow.

Your line of credit’s repayment terms can vary depending on your lender and the account’s terms. With some lines of credit, each draw has its own repayment term, and you’ll repay the draw with daily, weekly or monthly payments. In other cases, you may make regular payments but each draw you take could reset the repayment term for your account.

While business lines of credit and business credit cards can both be revolving credit accounts, they generally work in different ways.

Credit cards tend to be best for day-to-day purchases, and they require at least a monthly minimum payment while you can revolve the rest of your balance. If you pay your credit card balance in full each month, you might not pay any interest. However, there may be many types of fees on your card, including annual, cash advance, balance transfer and foreign transaction fees.

A line of credit is best for making large draws that you want to pay off over time. While you’ll pay interest on the entire draw amount, the interest rate on a line of credit may be lower than a credit card.

Both provide your business with the cash you need to grow, but the way these products are structured is different. When you apply for a small business loan, you receive the full amount you qualify for in one lump sum deposit. A line of credit, on the other hand, offers more flexibility than most loans and cash advances. Instead, you have the option to draw cash in increments, and continue drawing more until you reach your credit limit. Typically, lines of credit have lower interest rates and closing costs, which can make them more cost-effective. Small business loans are the better choice when you’re taking on a huge project with defined expenses. Lines of credit, however, can be better as a flexible backup to cover unexpected costs, or as a backup for your bank account.

A business line of credit can either be secured or unsecured. The difference depends on whether or not your lender requires you to put up collateral. Secured lines of credit are backed by collateral, while unsecured credit lines are not. To lower their risk, some lenders require that borrowers put up collateral, such as real estate, receivables, inventory, equipment, or their home. However, putting up your home as collateral puts both your personal and business lives at risk. For this reason, it’s usually not a wise choice. Backing your financing with collateral simply gives the lender confidence in the event you default. Years ago, it was difficult for a small business owner to qualify for an unsecured line of credit, especially through traditional lenders. Through the new world of online lending, though, small business owners can qualify for multiple unsecured line of credit options and compare rates. While they don’t require collateral, unsecured options may have slightly higher rates due to the lender’s increased risk. By putting up collateral and opting for a secured line of credit, you may qualify for a higher approval. That being said, you can usually still qualify for a competitive unsecured line of credit based only on your annual sales—even with personal credit challenges.

Lines of credit are intended to be flexible financing options custom-tailored to your needs. You can use them to cover expenses that are weighing your business down, or pursue exciting new growth opportunities. There are no restrictions on how you must spend this money— you can put it toward any expenses. Some of the most common ways that businesses utilize this business financing option include:

• Grow Your Business
  Ramp up your business and cover the expenses needed to expand hiring, payroll, take on new jobs, and more.
• Operating costs
  Always have cash on hand for rent,utilities, and other costs required to keep your business going on a day-to-day basis.
• Marketing campaigns
  Drum up new business and take on more customers with additional marketing campaigns in the mix.
• Seasonal slow periods
  Get the capital you need to keep your business moving during seasonal slow periods.
• Inventory or supplies
  Purchase additional inventory or supplies to capitalize on busy periods and new opportunities.
• Payroll
  Keep a reservoir of funding to cover the costs of payroll, especially with slow-paying clients.

Access to a line of credit is like having cash on demand. The second you need cash, you can draw from your line of credit and get things moving.

• Business name, address, phone number and email address
• Annual sales and/or revenue
• Business tax returns
• Financial statements such as your balance sheet and profit & loss statement
• Recent bank statements