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Q.How does a business line of credit work?

A.A business line of credit is a revolving loan typically used to finance short-term or seasonal expenses. It works on the same principle as a credit card —  you have a borrowing limit based on collateral and cash flow. You can use a business line of credit to borrow cash, and you only pay interest on the outstanding monthly balance. Each time you pay back principal, money is freed up again for future business loans. Business credit lines can be open-ended (like a standard credit card account), or they can be due at the end of a specified term.

A business line of credit can come in the form of either a personal loan, or a commercial loan. Many small businesses, especially start-ups, rely on personal lines of credit lines, which are secured by the business owner’s personal assets. While commercial lines of credit are preferable to personal credit lines because they use company assets as collateral, they are often hard for the small business to obtain.

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