Small business line of credit: how to choose the right option

A small business line of credit can help small business owners maintain constant access to funds to mitigate fluctuations in business expenses and income.

You might be thinking, “My business is profitable, we don’t need to borrow. But many businesses with or without cash flow issues keep a line of credit on hand for unexpected growth or expansion opportunities. A business line of credit is a flexible, often inexpensive, way to obtain short-term financing to cover working capital needs.

Basics of the business line of credit:

How does a business line of credit work?

A business line of credit is a flexible lending option for businesses. It can also be described as revolving line of credit. You are familiar with a line of credit if you use a credit card. It allows you to access the funds in your line of credit, to repay them in part or in full and to access them again. With a line of credit, the business owner decides when, if and how to use this borrowed capital.

Interest is usually only charged for the amount of the accessible line of credit, and interest rates can be fixed or variable. Variable interest rates generally change when interest rates in the economy change. Some lenders charge a draw fee each time you access the line of credit.

Additionally, there may be origination fees, annual fees, and / or monthly maintenance fees if you are not using your line of credit. For any line of credit you are considering, you should carefully read the terms offered to make sure you understand the fees that may be charged.

There will be a specified repayment period, but the payments will vary depending on the amount borrowed. With some lines of credit (especially those from traditional banks), there may be a drawdown period during which you can access funds and make interest-free payments. After that, the business owner can enter a repayment period in which the unpaid balance is to be repaid over a specific period of time.

Online lenders, on the other hand, often offer short-term lines of credit that fully amortize (or must be repaid) over a shorter period, often 6 to 24 months.

Benefits of a business line of credit

Here are some examples of scenarios where your business could benefit from a commercial line of credit:

  • Your business experiences seasonal fluctuations. Your sales may drop in summer or winter, for example. A line of credit will help you during times of low sales.
  • It takes weeks (or more) for your customers to pay you for the products or services you provide. You may need a line of credit to cover your business expenses while you wait to get paid.
  • You land a new customer and need additional capital to cover the cost of labor and / or supplies. A line of credit can cover expenses during production.
  • You have the option of purchasing equipment or inventory at a reduced cost. You can cover the bill with your line of credit while you wait for the cash to catch up.

How to get a business line of credit

You can apply for a line of credit from a bank or credit union, an online lender, a business loan broker, or an online marketplace where you can shop among various lenders. Lenders will most likely assess:

  • Time in business: 2 years or more is ideal but some are more flexible.
  • Personal Credit Ratings and / or Business Credit Ratings: Lender qualifications vary, but many require personal credit scores of 600 to 650, and banks often want even higher ratings.
  • Income: These will be verified through bank statements, financial statements and / or tax returns.

If you don’t have a business bank account, you’ll have a harder time qualifying. Also, some lenders will not lend to sole proprietors, so it may be helpful to incorporate your business as an LLC, S Corp, or C Corp.

When a business line of credit is a good idea

Similar to most businesses funding possibilities, the best time to get a line of credit for your business is when your business has healthy income and cash flow, rather than when your business is in a cash flow crisis. You are more likely to get the best deal when your business is financially healthy and has no cash flow problems.

Remember: you only pay interest on the amount you borrow. If you get a line of credit now, you don’t have to use it, but it will be there when your business needs additional capital. looking for a lump sum to finance a one-off project or a long-term project, a small business loan (especially a term loan) may be better for you than a business line of credit.

Better business lines of credit

Fund of funds

The Fundbox Line of Credit is a sensible approach to financing small businesses, with Learn more

Fundbox is a popular online lender. Your business must be based in the United States and must have been in business for at least 6 months with annual revenues of at least $ 100,000, a personal FICO score of 600+, and a business checking account. If you qualify, you will make weekly payments for 12 or 24 weeks. Interest rates vary.

On the bridge

Ondeck offers fast online approval for lines of credit between $ 6,000 and $ 100,000. Eligible borrowers make weekly payments for 12 months. Interest rates vary. There is no early repayment penalty.

SBA loans

Some businesses are eligible for SBA loans. These are small business loans that are typically made by financial institutions and guaranteed by the Small Business Administration. Most SBA loans are term loans, but there are options that include lines of credit. The rates and terms for these loans are often very attractive, but expect the application process to take at least a month, and sometimes longer.

Small Business Lines of Credit FAQs

What is a secured or unsecured business line of credit?

With a secured line of credit, the borrower provides security as a security deposit on the line of credit. It is common to put assets as collateral, but it can also be other assets owned by the business, such as equipment or inventory.

Secured lines of credit may be preferred over lines unsecured by a traditional financial institution such as a bank or credit union. The lender takes less risk and can therefore grant a higher credit limit at a lower interest rate for a secured line of credit. New businesses or businesses with poor trade credit may only qualify for a secured line of credit because of the inherently higher risk associated with a shorter history or low credit profile.

Unlike a secure line, a unsecured business line of credit does not require a specific guarantee. Unsecured lines of credit can be more expensive because the lender takes on a higher risk. Credit cards are a type of unsecured line of credit. Businesses with many years of credit and stellar business credit reports are more likely to qualify for reasonably priced unsecured business lines of credit. rates.

This article was originally written on August 8, 2018 and updated on July 14, 2021.

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