Obtain a business line of credit
A business line of credit (LOC) allows businesses to get the funding they need without collateral. A small business line of credit is cheaper than a standard business loan and provide higher flexibility. Apply for funds and get a flexible line of credit if eligible.
What Is a Business Line of Credit?
A business line of credit is a unique financial solution that helps small business owners manage cash flow. Although a business credit line is often confused with a small business loan, they are more similar to small business credit cards.
A business line of credit is typically an unsecured debt. It provides the business with access to money for business-related expenses. Unlike a business loan, there is no lump-sum disbursement with a business line of credit.
Most online lenders and other institutions that offer this service offer it on revolving terms, similar to how a credit card works. It is renewed annually, and the interest accumulates as you draw funds from the account.
Another feature that differentiates a business line of credit from business loans is, the money you pay is available to be borrowed again as you pay down the balance. However, the lender will set a limit to how much your business can borrow.
How Does a Business Line of Credit Work?
There are two types of business lines of credit, and each varies slightly from the other:
Secured Business Line of Credit
This type of line of credit requires the business to pledge an asset as collateral to secure the line. If the borrower cannot repay the line, the lender will assume ownership of any collateral and liquidate it to pay off the debt.
Unsecured Business Line of Credit
This type of LOC doesn’t require collateral. Qualifying businesses must have a strong credit history and a track record of business performance. Interest rates might be higher due to the increased risk.
Understanding how a line of credit works is simple once you determine which type of line of credit is best for your business. Finding the right lender for your business is the first step. Then you apply for a business line of credit.
If your application is approved, the lender can deposit the funds directly into the bank account through an ACH deposit. Businesses receive a statement every month detailing how much credit they have used and the interest they have paid. With credit lines you only pay interest on the funds you use, unlike small business loans.
Upon repayment, your credit limit can be accessed again as needed. Repayment periods and payment schedules vary from lender to lender. Payment schedules typically require monthly repayments.
Besides the interest charges, some lenders might also have an annual fee to access the line of credit.
Business Line of Credit Pros
There are several benefits associated with a small business line of credit compared to other financing methods. These include:
- Flexiblilty – You only need to apply for the business line of credit once. After approval, you can draw funds when you need them and use them for any business-related expense. Also, the line of credit is revolving, meaning when you pay the funds back, you have access to them again.
- Interest – Only on the portion of credit used – You only pay interest for the amount of credit used with credit lines. Not for the entire limit extended to you. If you have a limit of $50,000 and only use $15,000, you pay interest on the $15,000. However, you should know that some lenders might charge additional fees to keep the account open, charge inactivity fees and other fees. It’s vital to understand the charges and interests upfront.
- Lender-borrower relationship – Credit lines help businesses forge a good relationship with lenders, benefitting the business. Responsible use and timely repayment of the credit can increase your limit or open up opportunities for financing for other projects in the future.
- Better credit rating – Some lenders report to credit bureaus. Using your credit line responsibly and keeping up with the payments is an excellent way of building your business credit. This can raise your business’s credit rating, which can help you access more credit or term loans in the future.
- Lower interests – Most credit line lenders have lower interest rates than major bank loans. Therefore, it makes more sense to use a credit line for some business expenses and situations to save you money. However, you have to check the terms and interest rates with the lender before you commit.
Business Line of Credit Cons
There are also some downsides that you should be aware of when considering a business credit line for funding:
- The application process can be complicated – Although lenders have made progress in simplifying application processes, it is not always the case. This is especially true if you’re applying for a business credit line from a major bank. You may be required to provide revenue reports and financial statements, among other documents that can be tedious to prepare. Fortunately, some lenders require less paperwork for the application process.
- Fees can quickly add up – Typically, business credit cards have higher interest rates than most business lines of credit. However, some lenders charge hefty withdrawal and maintenance fees which can quickly add up.
- Too much debt – It’s easy to find yourself in debt if you cannot pay back the funds owed because of a decline in sales or unforeseen losses.
Business Line of Credit Rates
There is no one size fits all line of credit. Depending on a number of factors, the rates vary greatly. The terms of the LOC also factor in to your interest rates. Typical lines of credit can be issued for as few as 12 weeks, or as long as 5 years.
Business line of credit rates vary from as little as 4.5% to as much as 50% or higher, depending on your situation.
What determines your rates?
Some of the factors that a lender will look at when considering how much you’re going to pay on your business line of credit include:
- Your credit history
- The type of lender you’re working with
- Your business history / health
- The interest rates of the broader economy
These interest rates are set at a “spread” above market rates, and that may also affect how much you pay in interest.
How to Apply For A Business Line of Credit
Business lines of credit can be applied for in a variety of ways depending on the lender. With some lenders the application process is quick and painless, while with others, like banks, the process can be lengthy and time-consuming.
Merchant Cash Advance is one of the few online lenders that offers a quick and easy business line of credit application.
Our application process is entirely online and only takes a few minutes to complete. The requirements for credit line applications are minimal and easily accessible. They include:
- A minimum of two years in business
- A personal credit score
- A business credit score
- Annual business revenue and profit statement
Contact Us for more information on small business loans and credit lines.
Business Line of Credit vs Loan: What’s The Difference?
Business loans and lines of credit are two of the most popular ways that businesses access credit. Even though both options provide financing for your business, understanding the subtle differences between them can make a huge difference.
Interest Rates
The most significant difference between business loans and business credit lines is the interest. Typically, a business loan will have a fixed interest rate. A line of credit may have a fixed or variable interest rate.
Payment Schedule
Business loans have a set number of payments with a set payment amount. Usually, the payments are due monthly, quarterly, or annually depending on the agreement with the lender.
With a line of credit, the payment amount required will vary month-to-month based on the amount drawn over the past 30 days.
Draw Schedule
The draw schedules for business loans and small business lines of credit are very different. The proceeds are issued all at once for loans without any additional proceeds. With a business LOC, the business can draw amounts as needed as long as the line of credit is not exceeded.
Term
Business loans can have various terms depending on the lender, the loan amount, the collateral, and the needs of the business. The terms for a business loan can vary from 3 months to 25 years, depending on the type of loan you obtain.
A business line of credit typically can last for up to 5 years with the option of the bank calling the line due on an annual basis. That means the lender can cancel the line of credit at any time and require the business to pay the outstanding balances.
Fees
Loans have fixed fees including processing fees, appraisal fees, and credit fees. Business lines of credit may have varying fees including an initial processing fee or a transaction fee each time you draw.
Secured vs. Unsecured Business Line of Credit: What’s the Difference?
If you’re set on going for a business line of credit over a business loan, you need to decide whether it will be a secured or unsecured line of credit. Sometimes, it might not be your choice. But you need to understand what each option means for you:
Secured Business LOC
- Collateral guarantees it
- Typically lower interests than an unsecured LOC because of the reduced risk
- If the borrower defaults, the lender can seize the collateral
Unsecured Business LOC
- It is not guaranteed by an asset
- It is riskier for lenders, so the interest rates may be higher
- It may be more challenging to get approved by lenders
Alternatives to Business Lines of Credit
As the demand for financing among businesses increases, lenders are coming up with more ingenious ways to meet the demands. Other than a business line of credit, there are different possible ways for businesses to access financing.
Small Business Loans
Small business loans are a flexible and adaptable way for businesses to access quick and efficient funding. Companies can turn to banks or online lenders like Merchant Cash Advance for small business loans. The requirements are often minimal, and the processing times are faster, especially with online lenders.
Grants
Federal and state grants are not easy to come by but are available for businesses showing signs of success. Grants are more competitive and better suited to companies in some industries than others.
Crowdfunding
Crowdfunding is viable for businesses that are getting off the ground. Most companies considering this option don’t have enough history of applying for a line of credit. Crowdfunding also works for businesses launching a new product. It doesn’t have as many requirements, but it can be constricting and requires a lot of work to succeed, and it is not guaranteed.
Peer-To-Peer Lending
Peer-to-peer lending is slightly unconventional, particularly in the business world, but it works. It’s a combination of crowdfunding, loans, and angel investments. Individuals borrow and lend money to each other. In this case, it can be businesses.
Venture Capitalists and Angel Investments
Venture capitalists and angel investors are willing to pump money into startups. These investors look for a return and will need a growth plan, an exit strategy, or a stake in your company. Companies in the tech, online, or medical fields are best suited for this type of funding. Businesses poised for growth are most likely to benefit from this type of investment.
Business Line of Credit Frequently Asked Questions
With an LOC (Line of Credit), businesses can access capital at affordable rates whenever they need it.
Most lines of credit lenders require that you have a business history of about two years to get a line of credit facility. Lenders that can take on a new business will require some sort of collateral to mitigate their risks.
The purpose of a business line of credit is to provide access to funds for your business. You can use the business line of credit for almost anything concerning your business. Some of the uses you can put a business line of credit into include working capital, asset purchase, and construction.
The journey to building business credit isn’t always easy or fast. First, you have to make sure your business is appropriately registered and get an Employer Identification Number (EIN) which is the first step in getting a business credit card score.
Open a business bank account and hire employees. As you pay your bills and make payments using the business bank account, your business credit will start to build naturally. You can accelerate the process by applying for a business credit card, line of credit or a loan.
Funding Your Business Is Our Business
Conclusion
A business credit line can be a lifeline for businesses that need regular and flexible access to funds in order to run and maintain working capital. Credit of this kind is expected to have both benefits and drawbacks. As a responsible business owner, you must make sure you understand the terms and rates of the credit line before committing.
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