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Intro To Business Lines of Credit
Many small business owners have only heard of a few ways to fund their businesses. The most popular options include term loans, equity financing, or business credit cards. Yet, another extremely advantageous option often goes overlooked solely because it’s not as popular. This is the Business Line of Credit.
When someone learns how business lines of credit operate, their first thought is usually along the lines of “Why don’t more small business owners use this?” A business line of credit is like the best of both worlds. It allows you to fund your company without the various hassles or costs that come with other options. You could even view a small business line of credit as a “secret weapon” to bail you out of unforeseen cash flow problems or help you capitalize on unexpected opportunities.
In this guide, we’ll answer the following questions and more:
What Is a Business Line of Credit?
A business line of credit functions almost like a credit card. You have a credit line that you can borrow from at any time. If you’re carrying a balance, you’ll have a minimum payment. You only pay interest on the portions that you borrow. And when you pay off a part of your balance on time, that money usually becomes available to you again. This is because most lines of credit are technically called “revolving” lines of credit.
Unlike other loans, you don’t need to reapply each time you want to use the money available to you. And as the Small Business Administration (SBA) points out, small businesses need access to cash to survive and thrive. A credit line should be a priority because it could play a critical role in a small business’s success.
How Does a Business Line of Credit Work?
Once you borrow funds, you will have a minimum payment like a credit card. Depending on the lender, your first payment could be due the following week or at the end of the month. If you repay what you borrowed on time, your credit line replenishes. For example, let’s say your monthly payment is $200, and your interest is $10. If you paid back $200, your credit line would go back up by $190. Your interest rate depends on how quickly you pay off your total balance.
In some cases, you may have to pay a small fee (a.k.a. a draw fee) whenever you draw from your line of credit. Typical draw fees range from 1.6% to 2.5%.
Though you’ll have a repayment term, that’s just the due date for your total balance. As long as you pay back your full balance by that date, the entire credit line will likely become available to you again. Most lenders even allow you to pay off your total balance early to save on interest. Thus, as long as you keep paying off what you borrow and don’t exceed your credit limit, the credit line is essentially yours forever.
Borrowing limits tend to range from $1,000 up to $250,000. Interest rates start at 8%, with terms of up to eighteen months.
Also, lines of credit with lower credit limits are usually reserved for unsecured business lines. This means you don’t need collateral, though you may have to sign a personal guarantee.
Business Credit Lines – Research, Facts & Reports
Medium and high-risk credit applicants were about as equally likely to apply to a big bank (54%) as to an online lender (50%.) And they were more likely to apply to an online lender than to a smaller bank (41%) Source: 2019 Small Business Credit Survey
Not all applicants for business credit get the full amount they request. Almost half of the applicants (47%) reported receiving half the amount they were hoping for. Source: 2019 Small Business Credit Survey
What Are The Advantages of a Business Line of Credit?
With a traditional term loan, you have to make payments every month, plus interest, no matter what. Payments start immediately after funds are distributed, even if you haven’t used any borrowed capital. With a small business line of credit, you only have minimum payments when you use the money. Some lenders even offer an access card to use in stores and for online shopping.
A small business line of credit is the perfect solution for unexpected misfortunes or opportunities. These things happen all the time in the business world, and every company will eventually need extra cash. Maybe one of your retail items is drawing an unexpected level of demand. You’re on the verge of selling out, but you don’t have the cash to order more items. This is where a business line of credit comes in handy.
On the other hand, demand can also fall unexpectedly. In this case, a business line of credit could act as a cash cushion and allow you to continue running your company.
Sure, you could seek other options, like traditional business loans. But you’d have to go through the process of shopping for affordable rates, preparing documents, filling out applications, etc. A business line of credit goes in your back pocket and stays there.
Compared to credit cards, lines of credit have higher borrowing limits. If you borrow close to your credit limit for a credit card, your interest will skyrocket, and your credit score would plummet.
Lastly, business lines of credit typically carry looser requirements than other options. You don’t need excellent credit, high annual revenue, or more than one year in business to access enough funds to keep your company alive during an emergency.
What Are The Disadvantages of a Business Line of Credit?
Over the past decade or so, business lines of credit have become increasingly accessible. Many online lenders can approve secured & unsecured lines of credit in under 24 hours, even if you have bad credit. However, these products tend to have higher interest rates. And you might not be able to access more than $250,000.
A traditional business lender may offer lower rates and higher borrowing limits in exchange for steeper requirements. You may need high annual revenue, at least two years in business, and excellent credit. Collateral may be required as well.
Another disadvantage is that the best time to apply is before you need it. If you apply when your company is doing well, you’re more likely to access higher borrowing amounts and lower rates. You probably won’t access the same conveniences if you apply when your cash flow is suffering.
This segues into a significant reason business lines of credit aren’t as popular as other options. Business owners are notoriously busy. When their businesses are doing well, applying for small business loans is likely the last thing on their minds. To access the highest possible credit limit, you must somehow find the time to apply amid your hectic schedule. It’s simply not natural to think about applying for loans when you don’t need the money.
- Only pay on what you draw
- Draw funds immediately
- Less than prefect credit scored accepted
- Use for a variety of purposes
- Unsecured lines available
- Limited credit line amount
- It might require collateral*
- Might require personal guarantee*
- Higher interest rates with bad personal credit
- Unsecured lines of credit come with higher rates
Business Credit Lines Compared To Other Products
|LOAN TYPES||MAX AMOUNTS||RATES||SPEED|
|Merchant Cash Advance||$7.5k – $1m||Starting at 1.09||1-2 business days|
|SBA Loan||$50k-$10m||Starting at 5%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Line of Credit||$10k to $250k||Starting at 8%||1-3 business days|
|Receivables/Invoice Factoring||$50k-$10m||Starting at 5.8%||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 5%||3-10 business days|
|Revenue Based Business Loans||$10K – $5m||Starting at 9%||1-3 business days|
Who Qualifies For Business Credit Lines?
Approved businesses generally met the following criteria:
How To Apply For a Business Line of Credit:
Eligible small businesses must be in business for at least six months and have a minimum credit score of 550. You must also be able to prove that your company is currently earning a profit. If approved, you can get funded in 1-3 business days.
Here’s how to get started:
Step 1: Determine How Much Funding You Need
Unlike other loans, business lines of credit are often not pursued with specific investments in mind. After all, you’re supposed to apply before you need the money. For this reason, aspiring borrowers might not know exactly how much funding to request. So, think about how you’ll most likely use your funding and why you are applying in the first place. This will help us understand why you’re requesting this amount.
Step 2: Gather Your Documents
Depending on your creditworthiness, you might not all of the following documents. However, it’s better to have them on-hand just in case:
- Business bank account statements from the past three months
- Driver’s license
- Voided check
Step 3: Complete Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive Approval
If and when you’re approved, funds should appear in your bank account in 1-2 business days.
Your Business Line of Credit Gets Set Up – Now What?
Loans aren’t just a way to get financing for your company. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of business loan you get, make all of your required payments on time and in full. If you get a business credit line or another form of revolving credit, keep your balance below the credit limit and follow all the terms and conditions.
Consistently making your payments on time and in full will positively impact your credit. And that means preferred rates and terms when you next need a business loan.
What If I’m Declined For a Business Line of Credit?
If your application gets declined, it might be because a small business line of credit isn’t the right tool for your financing needs. In this case, we might recommend other working capital loan offers, business credit cards, or even a personal loan, both of which can be obtained through our partners. Once you establish a solid payment history with either option, you may see a different outcome if you apply for working capital a second time. You’ll also get a better idea of which expenses can be covered by a business credit card and how to make the best use of your borrowing limit.
Another possibility is that you were declined due to poor personal credit scores. If so, you should consider our credit repair services. We can help you boost your personal credit scores by eliminating the issues that are keeping them down. We can also help boost your business credit rating with business credit bureaus if that happens to be the reason why your company was declined.
People Also Ask:
When Is a Business Line of Credit a Good Idea?
Due to the lower borrowing limit, shorter terms, and interest system, it’s best to use a business line of credit for short-term initiatives. Examples include ordering inventory, covering operational expenses for a month or two, or hiring more workers for a last-minute project.
Which Type of Lender Is Best For a Business Line of Credit?
This depends on your ability to meet requirements like credit score, annual revenue, or time in business. If you can meet these requirements with flying colors, you might consider seeking funding from a bank or credit union. These lenders offer higher borrowing amounts, lower rates, and longer terms. However, their application process is considerably more involved than an alternative or with online lenders. And you may have to provide collateral. Thus, if you cannot meet these requirements, you may still be able to access a substantial borrowing amount through an online lender, even with bad credit, secured vs. unsecured.
What Is a Revolving Line of Credit?
This is one of the first questions you should ask when seeking a credit line: Is the product revolving or non-revolving? With a revolving line of credit, paying back what you borrow makes those funds available again. As long as you continue to pay off your total balance, your terms and interest rate stays the same.
A non-revolving line of credit, on the other hand, does not replenish when you pay off the total balance. You borrow, pay it back, and then it’s gone.
Should I Get a Line of Credit or a Business Credit Card?
An unsecured business line of credit is essentially a revolving credit card with a higher borrowing limit and lower interest rate. Hence, this decision primarily depends on the cost of the expense at hand.
If you’re looking to cover a few minor, recurring expenses, a business credit card might be the better choice. If you’re looking to cover more considerable temporary costs, you should probably pursue a line of credit. To clarify, a business line of credit makes more sense when you regularly need extra cash for more substantial expenses. On the other hand, a business credit card is best for smaller expenses that don’t increase in cost.
Should I get a Business Loan or a Line of Credit?
Will a small business line of credit work for you? At United Capital Source, we’ve helped get revolving credit lines for hundreds of industries, from retail to landscaping to auto repair. If your company experiences lots of seasonal fluctuations, this option is probably your best one. When considering a business line of credit, ask yourself these questions:
Do I need…
- To make several quick investments instead of one long-term investment?
- Flexibility instead of a fixed repayment schedule?
- Quick access to funds?
If you answered yes to these questions, then this is probably the right choice for you.
Can I Get a Business Line of Credit with Bad Credit?
This product is available to borrowers with bad credit, but your borrowing limit may be lower, and your interest and terms will be less convenient. However, if your cash flow is solid, poor credit may have less impact on your borrowing limit, interest, and terms.
We’ve repeatedly mentioned that the best time to apply is before you actually need the money. Thus, if you’re concerned about poor credit impacting your borrowing limit or interest, you should definitely work on improving your credit score before you apply. UCS even offers credit repair services for this exact situation.