Business Line of Credit That Helps Toe the Expense Line
A business line of credit is a small business loan that gives the flexibility that a regular business loan doesn’t. With this type of loan, you can borrow up to a certain amount and then pay interest on the portion of money you borrow. You draw and repay the funds as you need, as long as you aren’t exceeding your credit limit. This works similarly to a credit card.
There are three main types of business lines of credit. You can choose unsecured, secured, or an equity line of credit. The main difference is whether or not there is collateral. You can use equity line of credit for businesses that have equity in residential or commercial real estate. The equity in the business or home is used as collateral for the line of credit. Business lines of credit can be inexpensive to maintain, especially when you consider other forms of financing. Keeping one open costs virtually nothing and you are only responsible for paying the interest on the amount that you use each month.
How a Business Line of Credit Works
Business lines of credit differ from a regular business loan since you don’t get a one-time lump payment. With a line of credit, you keep using and repaying the money as long as you like. You do need to make your payments on time and you can’t exceed the credit limit. Many lenders will allow you to repay the full balance early to help you save on credit costs. A business line of credit ranges from $1,000 to $150,000, which is usually smaller than a term loan. A line of credit with a lower limit is usually not secured, which means that you don’t need to put up collateral, such as inventory or real estate.
Qualifying for a Business Line of Credit
There best way to figure out if your business qualifies for a line of credit is to apply. Don’t apply to too many lenders in case you don’t qualify. This is because you don’t want to be rejected and have it hurt your credit multiple times. Many traditional lenders, such as a bank, will require you to have strong revenue and a few years of history in order to get a line of credit. A larger line of credit may require some collateral, which can be taken by the lender if you fail to make your payments. In order to apply for a business line of credit, you will be required to have some documentation, such as bank account information, financial statements that include a balance sheet and profit and loss statement, and personal and business tax returns.
If you choose to go with an online lender, you may find that these lenders have looser qualification standards than banks. However, these lenders may have lower credit limits and could charge higher rates than a bank. You will need to have been in business for at least six months and have a certain amount in annual revenue in order to get a business line of credit. Some lenders don’t have a minimum credit score but usually, you would need to have a score of 500 or higher in order to qualify.
Where to Get a Business Line of Credit?
There are a number of financial institutions that give you a line of credit. With a business loan shop local. Local banks and credit unions can be great options. These financial opportunities actually exist to serve the community and may be more flexible with your credit application than big banks. You may have more success.
There are also plenty of alternative lenders online. Since the qualification process uses an algorithm, with an online lender the approval process is quick. However, keep in mind that there may be some downsides to a quick approval process. Since it doesn’t have the same level of due diligence the lenders build the risk into the cost of the loan so the interest can be on the higher side. However, you may be able to accept the rate for access to instant necessary funds. You can also get business lines of credit from the Small Business Administration. These lines are usually for specific purposes, such as contract needs or seasonal expenses.
Benefits of Getting an Unsecured Business Line of Credit
There are a number of benefits of an unsecured business line of credit, making this a popular choice for every business.
Quick Access to Money
Lines of credit allow a business owner to use whatever amount of credit they would like when they would like. Any company may face a financial situation they didn’t expect and need cash quickly. A business line of credit can give you cash at these unexpected times when you need it quickly.
Easy Money Transfer
With an unsecured line of credit, you can transfer cash for business expenses in different ways. You can do this over the phone, through a check written, or online.
Helps Even Out Cash Flow during the Slow Season
For many businesses, a line of credit can be the perfect tool for balancing cash flow through slower seasons. This may be applicable for some businesses more than others and it will depend on your business. For example, a retail store that will make most of their sales during the holiday rush can be short on cash during the rest of the year, which makes it hard to make payroll. You aren’t able to use a credit card to pay for employees but a business line of credit can be helpful in this situation.
Improves Business Adaptability
There are times when you have a limited window in order to take advantage of opportunities. For example, if you are a manufacturer and your supply costs are reduced, you want to take advantage of this but may not have the cash on hand to do so. With a business line of credit, you won’t miss out on opportunities that will allow you to save money in the long run.
Generous Credit Limits
When a small business owner needs to make a larger purchase, he or she can usually do so with a business credit line that has a high limit.
Business loans typically require fixed monthly payments but unsecured lines of credit come with some more flexible payment options. Each borrower can choose to pay the minimum monthly payment, more than the monthly payment, or the full amount that they owe. This gives businesses a chance to repay the debt on a schedule that works for their financial situation.
Separation of Business and Personal
Since a business line of credit is issued to a company and not the individual business owner, the company begins to build its own credit history separate from the owner.
Develop a Good Credit History
When you make payments on time with a business line of credit, it can help your business build a strong credit score. This can allow you to apply for bank lines of credit in the future and could help with better terms for any future loans.
The Cons of A Business Line of Credit
The main drawback is that owners need to have discipline when it comes to tapping into the credit line. Debt can build up very quickly if owners are only making the minimum payment each month when there isn’t a fixed monthly payment. Interest can grow and become substantial and it leaves the business in a hard financial situation. There are also some other drawbacks.
Extra Fees and Charges: The business line of credit’s pay-as-you-go format may seem easy but the extra fees and charges can add up quickly if you aren’t careful. The additional costs do vary by lender so be sure to research this when choosing. You shouldn’t be drawn in by a low interest rate and then get slapped with other fees. Be sure to compare annual fees and other costs to find the right line of credit that suits your business or another financing product that could be more affordable for you.
Hard to Qualify: In order to apply for a business line of credit, you do need to provide a lot of documents. You may also need to have a yearly review to maintain your credit line. While some of the information is standard for any type of loan, it may be easier to get other types of financing with fewer requirements and a shorter application process.
Low Borrowing Limits: When compared to some other financing options, credit lines can sometimes come with lower borrowing amounts. If you need money for new equipment, an expansion project, or another expensive project, other financing options may suit you better.
Using a Business Line of Credit
Once you have a business line of credit it’s helpful to use the funds wisely. There are plenty of smart applications for a business line of credit. Examples include paying out seasonal bills, meeting payroll, buying products at a discount, and purchasing equipment. Business expansion is one of the most common reasons why a business owner would want to seek sources of capital.
Before you tap into your line of credit, it’s best to run the numbers first. Are you going to sell the items before you have to pay the debt back? If not, it could get you in trouble The only time you should be using funds from your line of credit is when you are confident you are able to handle the payments and then keep your debt at zero. With this long-term approach to your short-term capital, it sets the stage for positive opportunities in the future. When you make payments on time, you are also building your business’ credit rating and this helps you in the future.
Difference Between Business Line of Credit and Credit Cards
There are many similarities between a credit card and a business line of credit. The credit card company or lender will set the maximum amount you can borrow at a given time and you have the flexibility to use the money as you need.
Line of Credit: With a line of credit, you have a higher credit limit and access to money on demand.
Credit Card: With a credit card, you are able to have rewards programs and fraud protection and it’s more convenient to use.
Line of Credit: There needs to be a personal guarantee, there could be a possible misuse of funds, and there are strict eligibility requirements.
Credit Card: With a credit card, the risks include overspending, high interest rates, credit damage for missed or late payments, and not all vendors will accept credit cards.
Both a credit card and line of credit can be short-term financial options for business owners. It’s necessary for businesses to have access to cash in order to pay payroll, invoices, and day-to-day expenses, as well as for emergency situations. It can be easy to fall into debt with both options.
A business line of credit also has some similarities with term loans but there are some differences. With a loan, you are borrowing all the money at once and the repayment terms are usually five, 10, or 20 years. A loan will be the preferred product for things you want to finance over a long period of time.
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Is a Business Line of Credit Right for You?
If your company has decent credit and has been in business a while then it’s possible to get a business line of credit at an affordable rate. There are a number of reasons a business line of credit can be a good idea.
1. A business line of credit can be useful for your business to access cash to take advantage of opportunities or cover unexpected business expenses.
2. Opening a business line of credit in advance of when you need it can help you prepare your business for the future, even if you don’t need access to any capital right now.
3. A business line of credit can help you get better business credit, especially if the lender is reporting the information to the business credit bureaus.
A business line of credit may not be helpful to you if you haven’t been in business long. If you don’t have an established credit history, a business line of credit may not be the right option for you. Not every business will meet the eligibility requirements.
Mistakes You Could Make When Applying for a Business Line of Credit
When small business loan shopping, you want to make sure you are avoiding these common mistakes. Before you apply, it’s important to consider your business’ financial health, understand your options, and know your rates.
Not Having a Clear Idea of Why You Need Funds
You should always have a clear idea for what you need the funds for, whether it’s a line of credit or other types of business financing. If you obtain financing without a long-term strategy, you could have trouble getting financing in the future.
Rushing through the Application
As a business owner, it’s expected that you will be busy and work long hours. If you are in a desperate situation and need cash quickly, you can be tempted to rush through the application as fast as possible. This can hurt your chances of getting financing. Simple errors can cause problems, such as an incorrect business address or typo in your employer identification number.
You should set aside some time to really focus on the application and make sure everything is correct so there are no delays in your financing. Be sure to put your contact information and number. There are times when business owners put down the main business line, even though they typically won’t answer calls on that line. Then the lender won’t be able to get a hold of you and you will be left wondering why you haven’t gotten a response yet.
Being Dishonest in the Application
You can be tempted to overstate your financial situation on your application, especially if you need cash. This is a bad idea. Don’t try to fudge the numbers since this can get exposed through the underwriting process. If a lender finds out, it can hurt your chances of getting a line of credit. You don’t want to compromise the integrity of your business.
Misunderstanding Lender Requirements
Don’t apply unless you fully understand the requirements. Make sure you meet the minimum eligibility requirements which are on the website. This will increase your chances of getting approval and prevent any unnecessary credit pulls if you don’t meet stated eligibility requirements.
A business line of credit can be a useful financing tool for many reasons and there are a lot of benefits of having one. In order to qualify for a business line of credit, there may be a stringent application process. However, there are different lenders you can seek out that you may be better qualified for in the end. You can use a business line of credit different ways but it helps to have a strategy for paying it off so that you aren’t creating more debt for yourself and getting your business into financial trouble. When applying for lines of credit, make sure you don’t make any common mistakes. So you have a better chance of getting your application approved.
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Kevin Strauss is a personal finance writer and homeowner based in the Los Angeles area. Being in one of the most expensive markets in the country, he’s learned to maximize resources to plan for both his monthly expenses and future financial needs. Kevin has a passion for helping those in a similar situation navigate the complex world of personal finance so they can pay down debt, plan for the future and live out their dreams. In addition to covering personal finance in depth on Loanry.com, Cashry.com, Debtry.com, Budgetry.com, Billry.com, Creditry.com and Taxry.com. Kevin shares his expertise with readers who want to create budget-friendly habits across the web.