Business Lines of Credit

What is a Business Line of Credit?

A business line of credit is a flexible loan, allowing small business owners to access funds whenever cash flow needs arise.

Flexibility makes business lines of credit particularly attractive to small businesses or start-ups who may not have the credit history, patience or strong financial statements necessary to apply and get approved for traditional bank loans.

And, unlike term loans, business lines of credit do not require a specified loan amount decided upfront. Rather, just set up the account, take what you need up to your credit limit, and pay it back (with interest) when you can, or within the time frame agreed upon with the lender.

How Does a Business Line of Credit Work?

The process is fairly simple.

Apply for a LOC.

Agree to an acceptable interest rate and maximum amount of available funds.

Use the funds during gaps in cash flow.

Pay off your balance with scheduled payments (according to predefined terms) or by its maturation date.

You can use a business line of credit as frequently as you want, as long as you don’t go over your credit limit. Some lenders will require scheduled monthly payments (or on other time intervals), while others may only require that you make payments by the expiration date, which is typically 1-2 years after the loan is initiated.

A business line of credit is designed for small businesses, but it shouldn’t be confused with a “small business loan.” A business line of credit actually resembles the credit card model of borrowing more closely than other types of loans.

It’s often called “revolving” credit because

you don’t begin to accumulate interest until you actually draw funds,

you pay interest ONLY on what you borrow, and Mobile development

once you pay off the balance, your max limit of accessible funds is restored.

A revolving business line of credit is not only for emergencies or periods of low revenue. Perhaps your business is thriving, but you just need a little more cash for that discount bulk purchase of inventory. With a business line of credit, you’d now have the available cash. Take what you need, make the purchase, and pay it back when the time is right.

Why Should You Use a Business Line of Credit?

As you know, the demands of running a business don’t automatically pause during periods of low revenue. Your business can’t take a 30-day hiatus just because your customers take that long to pay an invoice. Bad weather, natural disasters, unexpectedly slow offseasons or just plain bad luck might sideline your business operations, but…

Bills still need to be paid. Repairs need to be made. Supplies need to be replenished. Employees need their paychecks.

Cash flow shortages can be unpredictable, making it hard to plan for when you’ll need more cash. You don’t want to take out a huge loan, end up not needing all of it, and then have to make scheduled interest payments anyway.

Wouldn’t you rather just have the option to draw funds if necessary?

A business line of credit offers a solution. Take what you need (up to a limit, of course) and pay interest only on the funds you’ve drawn.

Reasons to use a business line of credit

You can use the cash for anything

You’ll be comforted that funds are available, whether you need them or not

You’ll have a much easier time getting approved for a LOC than a traditional bank loan

You’ll enjoy the revolving credit, allowing you to restore your maximum credit limit when you pay off your balance

You want to establish a credit history and improve your credit score

Reasons not to use a business line of credit

You can get approved for a traditional bank loan (with lower interest rates)

You need a loan for a specific purpose such as car or mortgage financing

You aren’t able to show evidence of significant revenue and are unwilling to put up collateral

Business Line of Credit Rates and Terms

You can expect interest rates to be in the range of 7-25%. In simple terms, if you draw $100, you will have to pay back between $107-125 to cover the principal plus interest. Depending on your agreement with the lender, interest may grow as time elapses. Therefore, it’s important to understand the details of your business line of credit. If you’re looking to cover very short gaps in cash flow, you might not mind scheduled monthly payments. If you expect a longer gap between your cash flow shortage and resumption of normal revenue, you should pursue a more flexible payment schedule.

7-25%

Interest Rates

$5k – 1M

Credit Limits

600+

Credit Score

1 day

Funding Speed

As mentioned, credit limits usually begin around $5,000. At the opposite end, it is possible that a business willing to put up collateral could get approved for up to $1 Million. However, businesses with significant assets and substantial revenue would likely pursue a traditional bank loan.

A secured or unsecured business line of credit typically has a lifespan of 6 months to 5 years, although a 1-2 year range is more common. Within that lifespan, many non-traditional lenders will require monthly or even weekly payments. Banks, on the other hand, maybe more flexible.

While maximum credit limits are what concerns most potential borrowers, note that some lenders will require a minimum credit limit. For instance, if you have a maximum credit limit of $100,000, you may be required to use a minimum of $25,000. This ensures that the lender can profit on at least some of the accessible funds through interest payments. Some lenders might also require a minimum first draw. For example, you may be required to draw at least $500 the first time you access your funds.

Finally, you may be wondering how quickly you can access the funds once you set up the LOC. This again will vary, but most non-traditional lenders can get you the cash within 1 day, while banks may take just a bit more time. Remember, business lines of credit exist to provide flexibility, convenience, and easy access. So you really shouldn’t have to wait longer than a few days to get the funds you need.

How to Qualify for a Business Line of Credit

While business lines of credit are easier to obtain than traditional loans, banks and other lenders will require some proof that you can pay back the funds. Some lenders will require a credit score of at least 650–others will be less concerned, knowing that businesses often choose this kind of borrowing because they lack significant credit history.

(On a side note, signing up for a business line of credit and paying it off in a timely manner can boost your credit score!)

Typically, lenders would like to see that you’re an established business with a few years of consistent revenue. Evidence of this may include tax returns, bank account information or financial accounting statements.

Non-traditional lenders, as opposed to banks, may offer a lower barrier to entry. However, this might come with a cost, in the form of a higher interest rate and/or a more stringent schedule of payments.

If you’re seeking to renew an existing line of credit, the bank may require you to show that you can keep your balance at zero for 30 days (although this pre-defined time period varies with the lender). Also, as with a credit card, you may get an increase in available funds as a result of your payment history.

Start-ups with 3-6 months of revenue of at least $25,000 may find lenders willing to offer lines of credit with a modest credit limit. However, this would likely require more frequent payments and possibly, collateral. Speaking of which…

Secured vs Unsecured Lines of Credit

Secured lines of credit require collateral to be used as a security deposit. This arrangement usually applies to businesses seeking maximum accessible of funds of over $100,000. Banks and lenders, of course, need to protect themselves and minimize risk. Therefore, to obtain a higher limit or lower interest rate, you’ll have to agree that if you cannot pay off your balance, the lender can seize your assets, such as property, equipment or inventory, depending on the terms of your LOC.

Unsecured lines of credit are more common with lower credit limits. Therefore, if you’re seeking a credit limit in the general range of 10,000 to 100,000, you shouldn’t have to worry about putting up collateral. However, as banks are taking on risk without the ability to seize assets, this type of LOC will require higher interest payments.

Keep in mind, even though collateral is not required, late payments or delinquencies can still hurt the borrower, as prolonged interest rates will quickly drive up the price of the loan. And of course, this can be damaging to your credit score.

If a business line of credit sounds like the solution to your cash flow problems, talk to our managing director today!