Business Line of Credit

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How much are you looking for?

Loan Amounts

$10,000 – $5,000,000

Terms

Revolving

Rates

Starting at 5.75%

Speed

as quick as 24 hours

What is a Business Line of Credit?

A business line of credit is a flexible financing option used by small business owners as a solution for working capital needs. Business lines of credit provide small businesses with the option to draw from their line of credit when they need to use capital, without having to pay interest until money is actually 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 and cover the lender in case the business loan is not paid back.

One of the major benefits of using a small business line of credit for small business owners is the revolving nature of a line of credit. With a revolving line of credit, the balance of money available goes up and down based on how much money the small business spends, and after the capital spent is paid back, the interest charges are paid and the original capital amount is available again. Basically, as small business owners make payments toward the money they spent on their line of credit (including interest), the amount of availability goes back up. This flexibility provided by business line of credit makes it an attractive financing option for business owners because the money is there for them when they need it. When a small business owner uses the funds, they pay interest on the money used, but when they don’t use the amount available, they don’t have to pay interest.

For small business owners, there are many benefits to using a business line of credit for small business expense needs. By having standby capital available, you can use the money for new growth opportunities, emergencies, seasonal expenses, and virtually any other business expense. With a business line of credit, you don’t have to spend money on interest for funds that you don’t use. With a business line of credit, small business owners can adapt to slower months of revenue, most notably in seasonal businesses, and make the adjustments necessary to keep their small businesses performing. For example, if a small business needs to hire more people for a new job, or if a good deal came up on new inventory, instead of using cash from the limited working capital available to them, small business owners can utilize a business line of credit. The additional capital can be used for short-term expenses, payroll, equipment, or to bridge gaps in other business expenditures. A business line of credit is meant to provide small business owners with opportunistic capital as well as an additional security blanket. Flexibility, low cost, and no upfront fees are some benefits that draw small business owners to a business line of credit for small business financing.

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What are the different types of Business Lines of Credit?

There are many different types of business lines of credit, and as a small business owner it is important for you to do some research to determine which is the best small business line of credit for your small business. Choosing a lender that works well with your communication style and your work style is extremely important when you are looking for the best business line of credit for your small business. Especially with the vast amount of information available online from different lenders or other financial resources, it is easy to find out how to get a business line of credit. Numerous websites offer a business line of credit calculator when you are looking for information about how to get a business line of credit for a new business.

Whether you are looking for your first business line of credit or you are looking for an easy business lines of credit for additional projects or businesses, you should know what some of the different types of business lines of credit are. Here, we will discuss unsecured business lines of credit, secured business lines of credit, asset-based lines of credit, and accounts receivable lines of credit. The major difference between these types of business lines of credit is the type of collateral, if any, that is used to secure the funds being borrowed.

Unsecured Business Line of Credit

Whether you are looking for business lines of credit for new businesses or just looking for the best line of credit for small business in general, the first thing you will want to determine is if you want a secured or an unsecured line of credit. An unsecured business line of credit requires no collateral. Unsecured business lines of credit will typical have higher rates compared to secured lines of credit because there is additional risk for a lender. By putting up collateral to secure the loan, the lender is guaranteed to get something back for the money they are borrowing.

Because unsecured lines of credit are riskier for lenders, additional information and qualifications may be a roadblock for some small business owners. To qualify for an unsecured line of credit, business owners must have good personal credit, they must be able to demonstrate that they have a longer time in business than businesses applying for secured lines of credit, and they must be able to demonstrate that their cash flow can sustain payments. Unsecured lines of credit have lower credit limits and are typically limited to $250,000. However, one benefit for unsecured business lines of credit is that if you have been in business for over three years, you have a strong credit history, and can demonstrate a strong personal credit history as the small business owner, the likelihood of being approved for an unsecured business line of credit is high.

Secured Business Line of Credit

If you are a new small business owner, secured business lines of credit might be easier to qualify for compared to an unsecured line of credit. A secured business line of credit is backed by an asset, typically referred to as collateral. Putting up collateral to secure a business line of credit ensures that 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. If you are a new business owner applying for a business line of credit, it might be a good idea to apply for a secured line of credit, especially if you have the equipment or other assets that can be used as collateral to secure the funds. By putting up valuable collateral, the borrowing limits can be higher and the interest rates may be lower, depending on the lender.

Asset Based Line of Credit

Some small business owners do not have the luxury to apply for unsecured lines of credit and don’t have the available collateral to qualify for a general secured line of credit. An asset-based line of credit focuses even more on the collateral being used to secure the funds for the business line of credit. There is less of an emphasis on the cash flow of the business within an asset-based lending solution. Asset-based lines of credit are normally dictated by accounts receivables, inventory, and equipment. Although it can be the case that a wide range of items can be used for collateral with secured lines of credit, in some cases other type of collateral can be considered to help provide additional liquidity. These additional collateral options can include real estate or investments. Asset-based lines of credit help businesses that are tight on cash flow get the capital needed to continue operating and growing their business.

Accounts Receivable Line of Credit

Accounts receivable are money owed to a business owner after services or sales are rendered to clients and the invoices are be paid out based on terms agreed between a customer and vendor. An accounts receivable line of credit is a great option for businesses that provide payment terms to customers so that they can make use of the money owed to them for immediate cash flow. By using an accounts receivable line of credit, the money owed to a small business owner can be used to secure a business line of credit, and the money owed is paid directly to the lender upon payment.

Payment terms between small business owners and their clients typically range from 30-90 days, which in certain situations can put strain on the available cash flow for a small business. An accounts receivable line of credit helps to bridge the gap between the time the invoice is sent out to a customer and when an invoice is paid for. 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.

What are the Benefits of Using a Business Line of Credit?

A business line of credit offers flexibility that differs from ordinary traditional business loans. Business lines of credit allow small business owners to adjust to change, specifically in times of growth or in windows of inconsistent cash flow, because there are not many restrictions on the types of expenses that the funds can be used for. With a business line of credit, small business owners can borrow a certain amount of money and only pay interest on the percentage of the money drawn from the account.

Another benefit of using business lines of credit for your small business is that the application process is generally very quick and easy. If you take the time to find a lender that works well with your small business, applying for a business line of credit can be completed in as little as one day. Using a business line of credit is a great way for small business owners to finance their businesses, especially in growth opportunities or in slow seasonal situations to help your small business bridge gaps and give you the cash flow needed to survive. Many small business owners utilize business lines of credit and depend on them to cover ordinary operating expenses.

A line of credit for business owners is used similarly to a credit card for personal expenses, as you spend money, you pay interest on the funds used and the amount available decreases. As you make payments toward the amount spent, the amount available goes back up. With a line of credit, business owners typically increase their working capital to buy merchandise, pay suppliers, or even to make payroll. Business lines of credit have low document requirements throughout the terms of the line of credit, with weekly or monthly repayment terms. Some of the most common uses that small business owners use lines of credit for are for equipment, for inventory, or for payroll.

Line of Credit for Equipment

One of the biggest benefits of business lines of credit is the flexibility offered to small business owners in the way that the funds can be spent. When looking at the most frequent uses that small business owners apply for business lines of credit for, one common use for a business line of credit for small business owners is using line of credit for equipment. Buying the new state-of-the-art equipment to keep up with competitors or to ensure that you are providing your customers and clients with the best products and service can be expensive. With a line of credit for equipment, business owners have the opportunity to buy new equipment or make upgrades to their existing equipment that they may not have been able to afford with their 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. Instead of making large payments for new equipment up-front, small business owners can utilize business lines of credit to stretch out the payments across the terms of the line of credit. Credit lines for equipment help business owners purchase new equipment and increase revenues, all without using the necessary cash on the spot of what can be large, but necessary purchases.

Line of Credit for Inventory

Small business owners also often use business lines of credit for inventory. Every small business needs to keep their shelves stocked and their inventory must keep up with their business needs. An inventory line of credit is one of the most common forms of business credit lines used by small business owners. 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. By using a business line of credit for inventory, your small business will never fall short on what it needs to thrive.

Line of Credit for Payroll

Another expense that small business owners utilize business lines of credit for is for payroll. There are not many restrictions on the way funds are spent for business lines of credit, which means the funds can be used to fill payroll gaps and make sure small business owners are always keeping up with their payroll expenses. 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 to help fill capital gaps without breaking the bank or leaving their essential workers without pay checks. With new projects and growth comes the need to hire more employees. If a client is slow paying or simply does not pay their money owed, business owners can pull from a business line of credit to make payroll. Employees are the most important aspect of every business and having a line of credit available for payroll can ensure employees are always paid and a business keeps running.

Line of Credit for Purchase Orders

Sometimes small business owners utilize business lines of credit for purchase orders. A purchase order line of credit is used when business owners need to use capital to fill customer orders. By taking advantage of a business line of credit, small business owners can ensure that their business will never have to turn down jobs or business opportunities due to a lack of up-front money to complete orders. Business owners use business lines of credit for purchase order financing, which allows their business to take on larger projects and fill more orders, all without the stress of scrambling or trying to find the up-front money.

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

When small business owners are doing research about how to utilize and how to get business line of credit for their small business, there are some important questions that should be asked. Along with researching what is a business line of credit, how to get a business line of credit, or how does a business line of credit work. Business owners should know and understand what it means to pledge collateral for a business line of credit.

There are varying types of collateral that can be used for a secured business line of credit, when choosing the right lender for your small business needs, you should consider the collateral you have available and talk with the lender to see if they accept what you have to secure your business line of credit. Generally, lenders are more comfortable providing business lines of credit to small business owners when there is collateral available to back up the loan. Collateral helps business owners secure larger lines of credit, better rates, and more liquidity because they give lenders some additional security in case the small business has trouble paying back their money owed. By putting up collateral to secure a business line of credit, small business owners are more likely to be approved for lines of credit for their small business. There are four types of collateral that are commonly used when securing a business line of credit: machinery and equipment, accounts receivable, inventory, and purchase orders.

Machinery and Equipment

Considered a hard asset, machinery and equipment are favorable assets to be considered as collateral to secure business lines of credit for small business owners. By sharing the make, model, year, and the condition of the machinery or equipment, lenders have the ability to assign a value to the fixed assets being used for collateral. 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 for clients or customers. Similar to 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 availability on the line of credit against that $100,000 invoice.

Inventory

The type of inventory, the ease of liquidation, and the location of the inventory play major roles in determining the advance rate or LTV that a 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 are rates for a business line of credit?

There are an assortment of lending companies that offer business lines of credit with varying rates, credit criteria and structures. Rates for a line of credit can range from 5.25% to 29.99%.

Credit rates are determined by multiple factors most notably the following:

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The business owners personal credit profile
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The current cash flow in the business
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Business historical cash flow
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Industry
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The credit history of the business
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Years in business
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Trade credits
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Diversity of customers

What is the business line of credit application process?

The application process for a business line of credit is simple and quick for most small business owners to complete. If you are a small business owner looking for a business line of credit for new business or looking for an instant business line of credit for your small business, you should speak with an SMB Compass lending advisor to streamline the process. The only documents required to secure a business line of credit are six months of bank statements and completion of the one page application. You might need to show proof that you have two to three years of business experience to get approved, in addition to showing that you have good personal credit history as the small business owner and good business credit.

It is important to apply for a business line of credit while business is going well, as the rates will be reflective of how your business is performing. If you wait until your business starts to decline in sales, starts having losses, or line utilization increases, there will be higher rates and a higher chance of being declined for a business line of credit. Also, the lenders will look into how you have paid back loans in the past, credit utilization for any other loans your small business has, as well as your own personal spending. Generally, if your business has good credit, meaning that you do not have any late payments or delinquencies, and the small business owner can demonstrate a strong personal credit history, most small business owners will be approved for a business line of credit. After all of the documentation is received, a business line of credit can be secured and funds can reach your account within 24 hours in some cases.

FAQ About Business Line of Credit

What is a business line of credit?

A business line of credit is a flexible type of financing that some small businesses use to address different working capital needs. Small business owners often use business lines of credit for small business so that their business has the working capital available on hand, without paying interest on any of their capital that is not being used.

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.

Is collateral required for a business line of credit?

Different lenders have different requirements, and the characteristics of your small business and the line of credit being requested might influence whether or not collateral will be asked from the lender in order to approve a loan. Depending on the size and structure of the line of credit, collateral may need to be required, this is one of the things to consider when picking a lender. Typical small business lines of credit do not require collateral, while larger lines over $250,000 may require collateral.

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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