Business Line of Credit
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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 to improve working capital.
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 $10,000 to $5 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.
Loan Amounts
$10,000 – $5,000,000
Rates
Starting at 7.99%
Speed
24 - 48 Hours
How Does a Business Line of Credit Work?
Here's how a business line of credit works:
Application: You apply for a business line of credit with your lender, providing information about your business's financial health and creditworthiness. The lender will then determine your maximum credit limit.
Approval: Once approved, the lender will provide you with a credit limit and an agreement outlining the loan's terms, such as interest rate, repayment terms, and fees.
Draw: You can draw from the line of credit as needed, up to the credit limit. You may access the funds through a check or by transferring them to your bank account.
Repayment: You pay interest on the amount borrowed and may be required to make minimum monthly payments. You can also repay the entire amount borrowed at any time without penalty.
Re-borrow: Once you repay the borrowed amount, you can reaccess the funds, making it a flexible source of working capital.
Secured vs. Unsecured Business Line of Credit
As you continue with your research on business lines of credit, you’ll find two categories of credit which would give you thoughts to apply for lines of credit: secured and unsecured business lines of credit which could be also known as small business lines of credit. 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 small business loan. It could be real estate, equipment, or other valuable assets the company holds. Regardless of the purchase, the collateral adds a layer of protection for the credit line.
With collateral, lenders will have something to repay 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. 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.
| 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 |
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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 business for expenses like working capital, 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
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 flow. However, like other investments, it comes with certain disadvantages and risks.
Below, we’ll outline the pros and cons of business lines of credit:
PROS
CONS
How to Get a Business Line of Credit
To apply for a business line of credit, you’ll need to fill out our online application form (it’s free and won’t affect your credit score) and submit your bank statements. We’ll review your application and reach out to you to discuss the loan options suitable for your business.
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FAQ
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.
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.
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.
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.