Business Line of Credit

Get access to revolving funds when you need it most.

Ezra Cabrera

July 14, 2021
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Loan amounts from $5,000 - $5,000,000

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Revolving Terms

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Rates starting at 5.75%

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Get your money in less than 30 days

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Loan Amounts

$10,000 – $5,000,000

Terms

Revolving

Rates

Starting at 5.75%

Speed

Less than 30 days
Business Line of Credit

What is a Business Line of Credit?

A business line of credit is a type of flexible business financing where companies are given access to a set amount of capital on an as-needed basis.

With the financing, you are not obliged to use up the full amount granted to you. Instead, you can draw the amount you need and pay it back later with interest. It’s also a revolving credit, so you can access the credit line repeatedly, provided that you don’t go over the set credit limit.

Once your application is approved, the lenders will open a credit line with a credit limit between $5,000 to $1 million. The exact amount will depend on your qualifications, specifically your business credit score, annual revenue, and business history. Essentially, businesses with stellar credit history and financials have high chances of credit approval.

Business Line of Credit benefits

Secured vs. Unsecured Business Line of Credit

As you continue with your research on business lines of credit, you’ll find that there are two categories of business lines of credit: secured and unsecured business lines of credit. While both options qualify a borrower to a set amount of credit, businesses must understand what each option entails.

As the name implies, secured business lines of credit are financing that requires collateral or an asset that will serve as security for the loan. It could be real estate, equipment, or other valuable assets the company holds. Regardless of the asset, the collateral adds a layer of protection for the lenders.

With collateral, lenders will have something to use as repayment if the borrower defaults on the loan. This gives them enough confidence to offer excellent terms and high credit limits to borrowers.

Unsecured business lines of credit do not have the collateral requirement. That being said, the lenders have nothing to tie up the loan to. Nothing to seize in case the business cannot fulfill the monthly payments. This adds significant risk to the lender’s side. That being said, lenders are more likely to charge a higher interest rate for the financing and may require the borrowers to sign a personal guarantee agreement to mitigate the risks.

Here’s a summary of the difference between secured and unsecured business lines of credit:

Terms Secured Business Line of Credit Unsecured Business Line of Credit
Collateral requirement Yes No
Credit limit Lower Higher
Interest rate Lower Higher
Risk (for lenders) Low Risk High risk
Business Line of Credit benefits

Business Line of Credit vs. Business Credit Card

Another distinction that borrowers must know is the difference between business lines of credit and business credit cards. Both options work similarly in a way that it provides businesses with access to a set amount of credit line. But there are certain things that you cannot pay for using your credit card, but a line of credit can cover.

A business credit card can come in handy in many instances. For instance, you can use the card for expenses like company food purchases, travel expenses, purchasing inventory, or paying the utility. Business credit cards also have a higher credit limit than personal credit cards. Plus, many credit card providers don’t report business activities to personal credit, making it an ideal solution for businesses who want to separate business and personal expenses and those who want to protect their personal credit.

But it’s worth noting that you can only use credit cards for vendors that accept credit card payments. If the vendor doesn’t accept credit cards, you may have to resort to cash payments. This is where a business line of credit can come in handy. You can use the cash from your credit line for expenses like rent, payroll, and other invoices. Plus, business lines of credit can also have higher credit limits than credit cards.

So, how do you know which financial resource to get for your business?

Having both financial resources can be helpful for your business. In general, use a business credit card under the following circumstances:

  • You don’t need a significant amount of cash for a specific business expense
  • You want to take advantage of detailed expense tracking
  • Paying for travel expenses like plane tickets, meals, accommodation, etc.
  • You want to earn rewards like points or cashback

Choose a business line of credit if:

  • Your business needs to fund a short to mid-term investment like expensive equipment
  • You want more flexibility
  • You need a financing resource with higher credit limits
Business Line of Credit benefits

Pros and Cons of Business Line of Credit

Business lines of credit are a great financial resource because it gives your company a chance to cover certain expenses without draining your cash reserves. However, like other investments, it comes with certain disadvantages and risks.

Below, we’ll outline the pros and cons of business lines of credit:

collateral for Business Line of Credit

PROS

Businesses Can Have Quick and Constant Access to Extra Capital

One feature that makes business lines of credit excellent financing of choice is that it offers fast access to capital. This can come in handy in situations where businesses find themselves facing an unforeseen expense. It could be broken equipment that they need to fix or replace or a business opportunity that only comes once in a while.

Further, businesses won’t have to worry about reapplying for financing as business lines of credit are revolving credit. In some cases, the lender allows companies to log into their account online and request money from their credit line. The lenders will then process the amount and transfer it to their account within 24 hours. Small business owners won’t have to worry about going through the lengthy application process again.

It Offers Spending Flexibility

With a business line of credit, you can use the proceeds for almost anything – as long as it’s for your business. You can use the capital to buy equipment, cover rent and utilities, payroll, marketing, renovations, and others.

Interest Rates are Only Applicable to the Amount You Used

As mentioned, business lines of credit are unique in a way that it only lets you take only the amount you need. That also means that you only have to pay the interest on the borrowed amount.

To put it into perspective, let’s take an example. Suppose the online lender approved your business line of credit for $10,000, and you used $2,000. You only have to make the daily or monthly payment for the $2,000 you used and the interest on that amount. If you didn’t draw money from your credit line, you wouldn’t have to pay for the principal and interest. However, know that you’ll still be charged for the maintenance fees for your account.

It Helps Build Business Credit

Businesses often have a hard time qualifying for comprehensive business loans because of the lack of credit history. If you’re looking to improve or build credit, a business line of credit can help. Many lenders may work with businesses with credit scores as low as 580.

As long as you make timely payments and you don’t go over the credit limit, you can improve your credit score and boost your chances of qualifying for comprehensive loans in the future.

It Establishes a Relationship with the Lender

Like other types of loans, applying for a business line of credit puts you in contact with a manager that oversees your application. You’ll most likely be in touch with this person throughout the duration of your credit contract.

The regular correspondence between you and your loan manager will help build a business relationship that you might be able to leverage in the future. Anytime you need additional capital to cover business initiatives in the future – be it equipment, renovations, or raising the limit on your credit line – you can trust that your loan manager can help and make the process smoother.

collateral for Business Line of Credit

CONS

High Possibility of Misuse

As mentioned, business lines of credit come with flexibility. With that, business owners often get tempted to use the credit line for just about anything. While a business line of credit can be a valuable resource, irresponsible spending could easily backfire. For one, your debt-to-income ratio could increase, along with your credit utilization ratio. Both could mean bad news for your credit score.

Rates and Fees Can be Expensive

With lines of credit, you can expect the rates and fees to be higher than a typical small business loan, especially if you’re working with an online lender. It could even be higher if your credit score is lower than 680 or your business does not have a solid financial track record.

While rates may vary from one lender to the next, the average interest rates for credit lines could go up to 20%. If you’re applying from alternative lenders, the number could go higher. Some may even charge as much as 90%. On top of the interest rates, lenders may also charge other fees like account maintenance fees, late payment fees, prepayment penalties, and others, which can bring the charges to an even higher sum.

Loans Amounts are Lower Than a Typical Business Loan

Especially if you’re applying for an unsecured line of credit, lines of credit come with a lower borrowing amount than typical business loans. This is because the lenders face a much higher risk by lending to high-risk borrowers, such as small businesses.

That is not to say that you won’t be able to find a lender that offers business lines of credit with a higher credit limit. Online lenders may still offer it, but the business would need to present stellar credit and financial history to qualify. They can also expect higher interest rates and fees for the financing.

If you’re not applying from online lenders, chances are, you’ll have to go through a longer application process, submit a long list of paperwork and documents, and present collateral. All of which can be a deal-breaker for some businesses.

Frequently Asked Questions

How do you qualify for a business line of credit?

The main qualifications for securing a business line of credit are the business owner’s personal credit, documentation of the time in business, and the cash flow in the business. If you can provide this documentation to your lender, and demonstrate strong credit, you will most likely qualify for a business line of credit.

How long does the application process take for a business line of credit?

The length of time for the application process will vary from business to business, and different things, like the length of time you have been in business and the number of clients or contracts you can document might influence the likelihood of approval. Depending on the size of the line of credit, a private lender may only need 6 months of bank statements and an application to approve a business for a line of credit.

How would you use a business line of credit?

Businesses typically use business lines of credit for a variety of cash flow challenges. Some of the expenses used by small business owners for business lines of credit include covering unexpected expenses, purchasing inventory, making payroll, and covering different cash flow gaps. With a business line of credit, small businesses have standby capital that’s relatively quick to draw from and can use the funds to cover an expense or to take advantage of an expansion opportunity.

What are the different types of business lines of credit?

Before exploring business lines of credit for your small business, you should consider the different types of business lines of credit to determine the best option for you. There are a few different types of business lines of credit, including secured lines of credit, unsecured lines of credit, asset-based line of credit, and accounts receivable line of credit. An unsecured line of credit does not require collateral, while a secured line of credit is backed by asset.

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