If you are a business owner who has struggled to pay bills or overlooked an opportunity to grow your business due to lack of capital, you know just how frustrating cash flow problems can be.
A business credit line is a potential solution for money flow problems.
This type of small business financing can be used for solving income problems, taking advantage of work at home opportunities, or having an emergency fund ready to go. When you have been approved for any line of credit, you can draw from your money handy anytime, unconditionally.
What is really a credit line? Could it be suitable for your business? And how would you acquire one? Find out below.
What Is A Business Credit line?
A business credit line is a kind of financing much like a credit card. When approved, the borrower has access to a set fee of money from which they are able to draw at any time. The borrower can pull from their money handy once they don’t exceed the borrowing limit.
Business owners often get a line of credit when:
- They have inconsistent cash flow
- They possess a seasonal business and want financing during the off-season
- They have to pay for supplies and inventory
- They want an emergency fund
- They are paying for a project but don’t know how much it will cost
A line of credit is a great option for companies that need cash fast. When you're approved for a credit line, you are able to tap into your available credit anytime — no application required.
How Business Lines Of Credit Work
Business credit lines act like charge cards.
Rather than receiving a single lump sum payment, as you might having a traditional loan, borrowers with a credit line get access to a credit line that they are able to borrow at any time. You can use that line of credit in whatever increments you desire, as long as the total amount you’ve borrowed is less than or equal to your credit limit.
Simple, right?
The loan may become a little more complicated in practice. Lines of credit come in a variety of forms with variations when it comes to their duration, grace periods, interest, draw fees (if any), and security. Make sure you completely understand the relation to your particular credit line before accepting a deal.
Learn about how specific types of credit lines work below.
Revolving VS Non-Revolving Lines Of Credit
Most lines of credit are revolving. For those who have a revolving line of credit, you'll be able to re-borrow cash once you have repaid your debts. For example, for those who have a borrowing limit of $5,000 and borrow $500, you've $4,500 remaining. If you repay the $500 you borrowed, you will have $5,000 to draw on again.
If you've got a non-revolving credit line, you won't re-gain access to the money when its repaid. You are able to draw just as much or less than you would like out of your line of credit, but as soon as you've borrowed the most your credit line is going to be closed.
Asset-Backed Business Lines Of Credit
An asset-backed business credit line is different from the most typical type since it is secured by collateral. The need for the collateral determines the quantity of credit you'll have use of.
Acceptable assets will vary between various lenders, but could include assets like:
- Your accounts receivable
- Inventory
- Equipment
- Bank accounts
Why would you go for this kind of credit line? Collateral cuts down on the risk for your lender. As a swap, you are able to borrow with better rates and terms then you would be able to otherwise.
Interest-Only Grace Periods
Some lines of credit come with an interest-only grace period, notably the ever-popular home equity line of credit (HELOC).
If your line of credit has an grace period, you only have to make interest payments for that period of the period. You do not have to pay for down the principal. Grace periods typically run from six months to 1 year. Within this time, you are able to draw from your line of credit as needed.
In many cases, when the grace period ends, you will no longer be able to use your credit line. At that point, it effectively functions like a traditional loan.
Business Lines Of Credit VS Business Term Loans
Business term loans come in a number of different forms, but each one is received via a single lump sum payment. After receiving your hard earned money, you typically have to begin repaying the loan immediately. Like business lines of credit, loans are meant to be utilized for particular business-related expenses.
Why would you desire a business loan on the business credit line?
- They’re (usually) easier to be eligible for a.
- The rates can beat an identical line of credit.
- You know precisely how much cash you need.
- You desire a predictable repayment schedule.
Why can you want a business credit line on the business term loan?
- You take some “insurance” against upcoming expenses.
- You don’t know how much money you’ll need to borrow.
- You wish to smooth out your company’s income.
- You want flexibility.
Business Credit lines VS Credit Cards
Credit cards are optimized for pos transactions — you swipe them and you’ve made the acquisition. What charge cards aren’t great for gets cash directly into both hands when you need it.
In fact, cash loan rates for credit cards are really dismal, and one from the worst ways to use your credit card.
Business lines of credit, however, really are a comparatively cheap way to infuse your company with money on short notice.
Credit cards come with an interest-free grace period every month, so a savvy credit cardholder can avoid ever paying interest on their own charge card purchases. The other hand of the is that any balance you carry on your credit card is going to be subject to high-interest rates.
Why can you want a credit card on the business credit line?
- You want convenience when creating retail purchases.
- You want to make the most of credit card rewards programs.
- You buy things you are able to repay quickly.
- You want the insurance coverage perks that include using a charge card.
Why can you desire a business line of credit over a credit card?
- You need money on demand.
- You need to carry a balance month-to-month.
- You need a higher borrowing limit.
Note that some lenders offer credit lines where you can tap all of them with a credit card. A few of these products have reward programs. Just make sure you realize without a doubt what type of product you’re working with so that you can use it optimally.
Should You Get A Business Line Of Credit?
A business credit line offers a insightful advantages to borrowers, but that doesn’t mean they’re an excellent fit for every company.
Line Of Credit Advantages
- Money when you need it: When surprise expense hits you, you don’t need to search involving the couch cushions for loose change or remove a high-interest short-term loan to cover the space.
- Peace of mind: Having a backup account to pay for expenses can perform a great deal to assist you to operate with full confidence.
- More credit for the effort: Since a revolving line of credit can be reused, you’re potentially obtaining a large amount of capital for that effort you place to your application.
Line Of Credit Disadvantages
- Fees: Annual fees, draw fees, and charges can add up over time. Should you don’t see yourself making use of your credit line in the near term, it may become an unnecessary expense.
- Easily abused: If you’re a spendthrift, using a deep well of credit to draw from might encourage your improper habits.
- Other financing may well be a better option: As we touched on earlier, there might be a much better tool for the job than the usual business line of credit. Should you only need a one-time cash infusion or need to make frequent, smaller retail purchases, consider a different product.
How To Get A Business Line Of Credit
Think that the business credit line may be the right option for your small business? Learn how to obtain a line of credit step-by-step.
Step One: Decide What Type Of Business Line Of Credit You Need
There are multiple types of lines of credit. Each is designed for different business purposes. You might like to consider the following common lines of credit:
- Revolving credit line: A line of credit where the amount you can borrow opens up as you repay outstanding loans.
- Asset-backed credit line: A line of credit secured by collateral such as accounts receivable, inventory, or equipment.
- Home equity line of credit (HELOC): A line of credit secured by your home equity. HELOCs make the perfect option for startups.
- Business charge card: A line of credit used to purchase goods and services.
Step Two: Assess Your Borrowing Health
Lines of credit are often harder to obtain than the usual traditional term loan.
You can limit your research and save time by assessing yourself as a borrower. Lenders is going to be taking a look at factors for example:
- Your credit score
- How long you’ve experienced business
- Your business revenue
- Available collateral
- Recent bankruptcies
Learn much more about how you can assess your borrowing health within our guide The 5 Cs Of Credit: What Lenders Search for.
Step Three: Search for Business Credit line Lenders
Once you've got a sense of your borrowing health, you can get a better knowledge of best places to focus your research for any lender. A wide variety of lenders offer credit lines, including:
- Banks
- Online lenders
- Credit card issuers
- The Small Business Administration (SBA)
Step Four: Complete Applications
To obtain a line of credit, you will, of course, need to fill out an application. What your application may be like will vary depending on the kind of credit line you’re applying for and also the lender you’ve selected.
Many line of credit lenders offer online applications. However, you may have to go to an actual location depending on the lender you're working with.
Common documents you might have to supply during the application include:
- Basic information about your business
- Business and personal tax returns
- Bank statements
- Personal ID
- Balance sheets
FAQs About Business Lines Of Credit
I'm starting a business. Can one get a line of credit?
Yes. Actually, there are lines of credit which are designed with startups and other new business organisations in your mind. In case your start up business doesn’t qualify for a credit line, you might qualify for an individual credit line you should use for business expenses.
I've poor credit. Can I obtain a business line of credit?
Bad credit isn’t no more the road. When you could have a hard time qualifying for any line of credit from the traditional bank, many online lenders offer credit lines to businesses with weak credit. Start your research by looking into our favorite credit lines for bad credit.
How hard is it to obtain a business line of credit?
The difficulty to get a line of credit depends on the lending company, your strength like a borrower, and the type and amount of money you are seeking. If you don’t worry about rates and terms, not very hard at all; finding one that matches your needs, however, may take worksome work.
Just how long will it decide to try get approval for any line of credit?
It can take anywhere from a couple of days to many months to become approved for a line of credit. Typically, online lenders are faster than banks, and banks are faster than the SBA. For charge cards, you’re looking at seven to 10 days generally.
Final Thoughts On Business Lines Of Credit
If your business could benefit from an economic back-up, a line of credit might be a very convenient way to overcome rough times.
Due towards the nature of the loan, if you’re considering a credit line, don’t wait. Credit lines are just useful if you have use of one once the need arises. Have lots of time to compare options before buying a credit line.
Ready to begin looking for a small company line of credit? Check out the Best Line Of Credit Choices for Small Businesses.
