Business Line of Credit
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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 draws, and after the capital drawn 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 drawn on their line of credit (including interest), the amount of availability goes back up. The flexibility provide by a 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 their operating cash flow, 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.
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 expenses, 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 line, 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
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 to 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 a 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?
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
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
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
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
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, 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
Accounts Receivable (A/R)
What are rates for a business line of credit?
Credit rates are determined by multiple factors most notably the following:
The business owners personal credit profile
The current cash flow in the business
Business historical cash flow
The credit history of the business
Years in business
Diversity of customers
What is application process for a business line of 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.