How To Get A Small Business Line Of Credit
If you are a merchant who has struggled to pay bills or missed out on an opportunity to grow your business due to a lack of capital, you know just how frustrating cash flow problems can be.
A business line of credit is a potential solution for cash flow problems experienced by small business owners. Lines of credit work as financial safety nets, so you have a source of extra funds if you need them. Once you have access to a credit line, it’s there whenever you need it — you don’t need to vet potential lenders or complete a long application. Although business lines of credit have been difficult to attain in the past, online lenders are making it easier than ever for businesses of all industries and sizes to get this type of financing.
What is a line of credit? Is it right for your business? Keep reading to find out how to get a business line of credit!
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What Is A Business Line Of Credit?
A line of credit is a financial product available for business owners, though it’s not quite like a traditional business loan. When you are approved for a line of credit, you don’t get any money. Instead, your lender will give you access to a certain amount of money (called a credit facility), from which you can draw at any time. A credit card is a type of line of credit, but there are other types as well.
Most business lines of credit are called revolving lines of credit because your credit facility replenishes as you repay the money borrowed (unlike a term loan, where you get access once to a specific amount of money). For example, if you have a credit limit of $10,000 and borrow $2,000, you will have a remaining credit facility of $8,000. When you repay the outstanding money, you will once again have $10,000 to borrow.
Draws are treated like small loans — outstanding capital is subject to interest, and is repaid in fixed, periodic installments (you may make weekly or monthly payments, depending on the lender). You might also have to pay other small fees, such as maintenance fees or draw fees. Repayment terms will vary from lender to lender.
Secured VS Unsecured Lines Of Credit
Most lines of credit are unsecured, which means you will not have to put up specific collateral to obtain a credit facility. That said, most unsecured lines of credit will require a personal guarantee and/or a UCC blanket lien, so you aren’t completely off the hook if you fail to make your payments.
On the other hand, secured lines of credit are backed by specific collateral, such as accounts receivable, inventory, savings accounts, real estate, or other assets. The size of the borrower’s credit facility is typically tied to the value of the assets. Because lenders have an easy way to recoup funds if necessary, a secured business line of credit normally has larger possible credit facilities and lower interest rates than an unsecured business line.
Common Business Line Of Credit Fees
Business lines of credit are often subject to fees in addition to interest charges. Typically, you’ll either have to pay a draw fee or a maintenance fee.
Draw fees are the line of credit equivalent of origination fees. If you have a draw fee, your lender will deduct a small percentage of the funds you have requested from your credit line. For example, if you have a draw fee of 1.5% and you request $1,000, your lender will deduct $15 and you will receive $985.
Draw fees are by far the most common fee assessed for lines of credit, but if you don’t have a draw fee you might have a maintenance fee. This is a flat fee charged on a periodic basis. For example, you might have a monthly maintenance fee of $10. Maintenance fees are charged whether or not you have funds outstanding.
How Does A Business Line Of Credit Work?
The big appeal of a line of credit is that you have the money available when and if you need it — you don’t need to fill out an application and wait for an underwriting decision every time you need funds.
Credit lines can be used for most situations in which you need short-term working capital, whether that’s to bridge a temporary cash flow gap or capitalize on opportunities you might otherwise miss out on. Business owners often use lines of credit to finance situations such as these:
- Overhead costs
- Seasonal expenses
- Emergency funds
While some banks and lenders require that you use your credit line for specific purposes, many others do not set limits on what you use your funds for (as long as you’re using them for business purposes).
How To Get A Business Line Of Credit
Due to the wide range of lenders that offer lines of credit, most businesses will qualify for some sort of credit line. Although you can get better rates if you have an established business with good personal and business credit scores, businesses with low scores and little time in business can still often qualify.
Head over to our list of the Best Business Lines of Credit for 2018 to find credit lines you might be eligible for. We list the minimum required time in business, revenue, and personal credit score for each lender, so you can easily tell which ones might work for your business. Or, if you still need more options, check out our full selection of business line of credit reviews.
Business Line Of Credit Alternatives
Business lines of credit are a useful resource for small businesses. However, if you don’t want a credit line, or don’t qualify, you have some other options. Business credit cards and short-term business loans are similar in some ways to lines of credit, but might work better for your business’s particular situation.
Business Credit Cards
Business credit cards are similar to lines of credit but are typically used in different situations. While lines of credit are normally only intended for occasional use, a business credit card can be used for everyday purchases. Still, a credit card can be a useful tool for managing cash flow and deferring payments to a more convenient time.
The advantage of credit cards is that if you are diligent about paying them off, you will not have to pay any interest. For contrast, lines of credit start accruing interest as soon as you draw from your account. Lines of credit also generally carry other up-front fees, such as draw fees, which credit cards might not have.
Head over to the Best Business Credit Cards for 2018 to take a look at our favorite cards.
Short-Term Business Loans
If you need a one-time loan, short-term business loans are a worthwhile consideration. Like lines of credit, short-term loans are designed to be paid back in a short amount of time, typically between three and 18 months.
Short-term financing is generally much easier to get than its long-term counterpart because it is considered low risk. While not quite as fast as requesting funds from a credit line you already have access to, short-term loans are the next fastest thing. For the most part, you’ll be able to complete an application and have your funds within three to four business days. If you don’t already have access to a line of credit and need funds immediately, this might be the way to go.
However, short-term loans can be confusing if you’re not familiar with factor rates (the way that short-term loan fees are calculated). Head over to our guide to short-term loans to learn everything you need to know.
If your business could benefit from a financial safety net, a line of credit might be a very convenient way to overcome rough times. An older, more established businesses with a good credit score will have an easier time being approved, but younger businesses might be able to get this type of business loan as well.
Due to the nature of the loan, if you’re considering a line of credit, don’t put it off. Lines of credit are only useful if you have access to one when the need arises. And as always, give yourself enough time to compare banks and online lenders before settling on a credit line. Ready to start looking for a small business line of credit? Head over to the Best Business Lines of Credit for 2018.