A Business Line of Credit is a great method to streamline cash flow
Small business owners can take advantage of many different options when it comes to funding their businesses. One of the lesser known, but extremely advantageous option is a Business Line of Credit. This option can be overlooked solely due to lack of popularity in comparison to a traditional small business loan. After learning about how beneficial a Business Line of Credit is, many business owners often find themselves questioning not only why this funding option is so advantageous but also, how quickly they can apply and be approved. A Business Line of Credit allows access to funds without the various hassles or costs that come with many of the popular funding options. A Business Line of Credit can be your “extra cushion” in any unforeseen cash flow periods and an aide in capitalizing on unexpected opportunities.
Business Line of Credit FAQ:
What is a Business Line of Credit?
- A Business Line of Credit functions similarly to a business credit card. There is a credit line that funds can be withdrawn from at any time. If carrying a balance, there will be a minimum payment that will need to be paid. Interest is paid on the portions that are borrowed. When a specific portion of the total balance is paid off on time, the money can then become available to the business owner. This is because most business lines of credit are like “revolving” lines of credit.
- A small Business Line of Credit does not require a new reapplication process each time a business owner wants to use the money available. A majority of online lenders do not require financial statements or tax returns.
How does a Business Line of Credit work?
- Once funds are borrowed from a small Business Line of Credit, the business owner will have to pay interest and have a minimum payment just like business credit cards. Depending on the lender, the first payment could be due the following week or at the end of the month. If repayment of the borrowed funds is made on time, the Business Line of Credit replenishes. For example, if a business owner’s monthly payment is $200 with an interest of $10, complete repayment of the $200 would mean the credit line would go back up by $190. The interest rate will depend on how quickly the total balance is paid off.
- In some cases, there is a draw fee. This fee is applied whenever the business owner draws from their Business Line of Credit. Typical draw fees can range from 1.6% to 2.5%.
- Everyone will have a different repayment term that will dictate how long the borrower has to repay the balance. As long as the full balance is repaid by the specified date, the entire credit line will likely become available again. Most lenders even allow the total balance to be paid off early to save on interest. Thus, as long as payments are made to account for what was borrowed and the business does not exceed the credit limit, the credit line is essentially the business owner’s forever.
- Borrowing limits tend to range from $10,000 to around $250,000. Interest rates start at 8%, with terms of up to 18 months.
What are the advantages of a business line of credit?
- With traditional small business loans, payments are required every month in addition to interest. Payments are required immediately after funds are distributed, even if the business owner has yet to make use of the borrowed capital. With a small Business Line of Credit, minimum payments are required only when the capital is used.
- A small Business Line of Credit is the ideal solution for unexpected calamities or daring opportunities. A Business Line of Credit can act as a cash cushion and allow for the smooth running of any company.
What are the disadvantages of a Business Line of Credit?
- A Business Line of Credit is easily accessible and therefore tends to have higher interest rates with limited access to no more than $250,000. Online lenders can approve secured and unsecured lines of credit in under 24 hours, even with less than perfect credit. Traditional business lenders may offer lower rates and higher borrowing limits in exchange for steeper requirements. They often require a high annual revenue, at least two years in business, and excellent credit.
- Another disadvantage to a Business Line of Credit is that the best time to apply is before there is essentially a need for it. When the company is doing well, it is more likely to be able to access higher borrowing amounts and lower rates. If the cash flow dwindles, the same conveniences may not be afforded by lenders.
- Draw funds immediately
- Only pay on what you draw
- Unsecured lines available
- Less than perfect credit score is accepted
- Limited credit line amount
- May require collateral
- Unsecured lines of credit come with higher rates
Who Qualifies For a Business Line of Credit?
Approved businesses generally met the following criteria:
How can I apply for a Business Line of Credit?
To begin, we need to determine the eligibility of a small business. The small business must be in operations for at least six months and have a minimum credit score of 550. The business owner must also be able to prove that the company is currently earning a profit. Once approved, funding can occur in 1 business day.
Step 1: Determine how much funding the business needs.
Unlike other loans, business lines of credit are often not pursued with specific investments in mind. For this reason, aspiring borrowers might not know exactly how much funding to request. In this case, specific use of funding is generally the first place to start. This will help us understand why a business is requesting a specific amount.
Step 2: Submit business bank statements.
Upload the last 4 months of your business bank statements.
- Once bank statements are submitted, an electronic application will be emailed to you.
Step 3: Complete quick 1-page electronic application.
Upon completing our one-page online application, our underwriting team works reviews your information to give approvals best suited for your business.
Step 4: Connect and discuss.
Once your application is submitted and reviewed, a trained and skilled representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This will ensure that there are no surprises or hidden fees during repayment.
Step 5: Receive approval.
Overall processing can take a few hours, and once approved, the funds will appear in your checking account in about 1-2 business days.
Which type of lender is best for a Business Line of Credit?
The type of lender that is right for a business will depend on the ability of the business owner to meet the requirements such as minimum credit score, annual revenue, or time in business. These are typical requirements of a bank or a credit union. These lenders offer higher borrowing amounts, lower rates, and longer terms; however, it is to be noted that their application process is considerably more involved than an alternative process or with online lenders. Banks and credit unions also often require collateral. If unable to meet the requirements of a bank or credit union, a business may still be able to access a substantial borrowing amount for a Business Line of Credit through online lenders, even with bad credit, secured business line, or unsecured.
What is a revolving line of credit?
With a revolving line of credit, paying back what is borrowed makes those funds available again. As long as the total balance is being consistently paid off, the terms and interest rate remains the same.
A non-revolving line of credit, on the other hand, does not replenish when the total balance is paid off. When the amount borrowed is paid back, it is no longer available for use.