Business Line of Credit

What is a Business Line of Credit?

A business line of credit is a flexible financing option used by businesses for working capital. It provides business owners with the option to draw from their business line of credit when needed and not pay interest until money is borrowed. Some business lines of credit are unsecured, while others are secured, using different assets as collateral. Secured lines of credit tend to have lower interest rates since there is collateral to protect the lender in case the business loan is not paid back. With a revolving line of credit after the remaining capital is paid back, the interest payments end, and the original capital amount is available. This flexibility of a business line of credit makes it attractive for business owners.

There are many benefits to having a business line of credit. By having standby capital, you can use the money for new opportunities, emergencies, seasonality, and virtually any other business expense. With a business line of credit business owners can adapt to slower months of revenue, most notably in seasonal businesses. The additional capital can be used for short-term expenses, payroll, and equipment. A business line of credit is meant to provide a business owner with opportunistic capital as well as a security blanket. Flexibility, low cost, and no upfront fees make business line of credits one of the most attractive form of small business financing.

What are the different types of Business Lines of Credit?

Unsecured Business Line of Credit

An unsecured business line of credit requires no collateral. Unsecured business lines of credit will typical have higher rates because there is more risk for a lender. To qualify for an unsecured line of credit business owners must have good personal credit, a longer time in business, and cash flow that historically can sustain payments. Unsecured lines of credit have lower credit limits and are typically limited to $250,000.

Secured Business Line of Credit

A secured business line of credit is backed by an asset typical referred to as collateral. This ensure that’s the lender has insurance in case the borrower cannot satisfy payments. With collateral business owners are able to secure lower interest rates and larger sums of capital. Eligible collateral that can be used for a secured lined of credit are; accounts receivable, inventory, equipment, purchase orders.

Asset Based Line of Credit

An asset-based line of credit focuses more on the collateral of the business rather than the cashflow. Assets based lines of credit are normally dictated by inventory, equipment and accounts receivables. Although the case, in some cases other collateral can be considered to help provide additional liquidity. Asset-based line of credits help businesses that are tight on cash flow get the capital needed to continue operating and growing their business.

Accounts Receivable Line of Credit

An accounts receivable line of credit is a great option for businesses that provide payment terms to customers. Payment terms ranging from 30-90 days put strain on the available cashflow of a business. An accounts receivable line of credit helps to bridge the gap between the time the invoice is sent until an invoice is paid. Accounts receivable lines of credit are similar to factoring, but an invoice line of credit gives more flexibility for the business and at a lower cost.

Why would you use a Business Line of Credit?

A business line of credit offers flexibility that differs from ordinary business loans. It allows businesses to adjust to change, specifically in times of growth and inconsistent cash flow. With a business line of credit, you borrow a certain amount and only pay interest on the percentage of money you draw from the account. A business line of credit is commonly used for working capital to buy merchandise, pay suppliers and make payroll. Business lines of credit have low document requirements with weekly or monthly repayment terms. A line of credit for equipment, a line of credit for inventory, and a line of credit for payroll are some of the most common uses for a business line of credit.

Line of Credit for Equipment

With a line of credit for equipment business owners have the opportunity to buy a piece of equipment that they may not have been able to with operating cashflow. Whether cash is available or not it’s always a good idea to finance equipment purchases. Equipment lines of credit provide flexible repayment terms that should be taken advantage of by every business owner. Credit lines for equipment help business owners purchase new equipment, increase revenues, all without using necessary cash.

Line of Credit for Inventory

An inventory line of credit is one of the most common forms of business credit lines. A line of credit for inventory allows a business to purchase the inventory, sell it, and pay the line back. When business owners have standby capital, they have the opportunity to purchase discounted or critical inventory. By having an inventory line of credit business owners can hold more inventory and avoid shortages. Access to flexible capital allows businesses that import their inventory to order in advance, ship by water, and avoid the high cost of air freight.

Line of Credit for Payroll

The flexibility of a business line of credit allows business owners to allocate funds for working capital in the business. Business owners frequently use business lines of credit for payroll. With new projects and growth comes the need to hire more employees. If a client is slow paying or simply does not pay, business owners can pull from a business line of credit to make payroll. Employees are the most important part of every business and having a line of credit available for payroll can ensure employees are always paid.

Line of Credit for Purchase Orders

A purchase order line of credit is used when businesses need capital to fill customer orders. It ensures that a business will never have to turn down jobs and business opportunities due to a lack of money. The use of purchase order financing will allow you to take on larger projects, more orders, all without the stress of needing money.

What type of collateral is used for Business Line of Credit?

There are varying types of collateral that can be used for a secured business line of credit. Lenders are more comfortable providing business lines of credit when collateral is available. Collateral helps business owners secure larger lines of credit, better rates, and more liquidity. There are four types of collateral that are commonly used when securing a business line of credit.

Machinery and Equipment

Considered a hard asset, machinery and equipment are favorable assets for business lines of credit. By taking the make, model, year, and the condition of the equipment lenders will have the ability to assign a value to the equipment. The typical advance rates or loan to value (LTV) assigned to equipment and machinery is 60% of the forced liquidation value (FLV). This means that a lender will provide availability based on what they would be able to sell the equipment for in the event of a default.

Accounts Receivable (A/R)

A/R or accounts receivable is money that’s owed to a company after a sale has been made or services have been rendered. Like asset-based lending, accounts receivable is a favorable asset to secure a business line of credit. Typical advance rates for a business line of credit range from 70% to 95% of the face value of the invoice. For example, if the face value of an invoice is $100,000 and the advance rate is 85%, the lender will give $85,000 as a loan against the invoice.

Inventory

The type of inventory, the ease of liquidation, and the location of the inventory play a major role in determining the advance rate or LTV that an lender will provide for an inventory line of credit. For example, a company that manufactures its own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective the faster and easier they can sell the inventory, the higher the value they will assign.

Purchase Orders

PO’s or Purchase Orders are commonly used to secure business lines of credit. A Purchase order is a document generated by the buyer to authorize a transaction with a seller. PO’s typically outline the terms of the sale, which include price, quantity, payment terms, shipping date, etc. Once this PO is accepted by the seller, a lender can use it as collateral. The LTV against purchase orders is typically between 30-40%, but once goods are shipped or services are rendered, the PO becomes an invoice and the remaining 40-50% of the invoice can be advanced.

What is the business line of credit application process?

The application process is simple and quick for a business owner to complete. You can speak with an SMB Compass lending advisor to streamline the process. The only documents required to secure a business line of credit is six months of bank statements and one page application. It is important to apply for a business lineof credit while business is going well, as the rates will be reflective of how the business is performing. If the you waituntil the business starts to decline in sales, has negative days, or utilization increases, there will be higher rates and a higher chance of beingdeclined for a business line of credit. After documentation is received a business line of credit can be secured and funded in 24 hours.

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