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 (LOC) 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 lengthy 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!
Table of Contents
1. Decide What Type Of Credit Line You Need
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.
Revolving Line Of Credit
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.
Asset-Backed Line Of Credit
An asset-backed line of credit is similar to a revolving line of credit, but with a few wrinkles. Your line of credit will be secured by an asset of some kind, typically your accounts receivable or inventory. Essentially, you’ll be borrowing against your future assets whenever you draw on your line of credit. Your credit limit will be based on a percentage of your accounts receivable.
Home Equity Line Of Credit
If you own a home and have built up equity — meaning the amount you owe on your home is less than its value — you can use your house as security for a home equity line of credit (HELOC). HELOC’s tend to have very long draw periods (10 years). They usually have variable interest rates.
Business Credit Cards
Remember when we said credit cards were a line of credit? We weren’t kidding! One of the easiest-to-get and easiest-to-use lines of credit is a credit card. Business credit cards are similar to personal credit cards, but they aren’t governed by as many regulations. They tend to have better rewards programs than personal credit cards, but the lack of oversight can mean high-interest rates and fees if you miss a payment.
2. Assess Your Borrowing Health
With the exception of credit cards, it’s often harder to get a line of credit than a loan. Extending credit comes with risks to the lender, especially if that line of credit has good terms and rates. That means you may have to jump through some hoops to qualify.
You can narrow down your search and save yourself time by assessing yourself as a borrower. Lenders will be looking at things such as:
- Credit Score: You knew this was coming. While there are plenty of lenders who won’t necessarily disqualify you for your credit score alone, almost any lender you borrow from will at least factor it into their calculations for rates.
- Recent Bankruptcies: If you’ve recently declared bankruptcy, you’ll have a harder (but not impossible) time finding lenders who will work with you.
- Time In Business: The longer you’ve kept your business afloat, the safer it will look to do business with you. Alternative lenders usually want to see that you’ve been going for six months or more. Banks will often want to see two to three years.
- Business Revenue: Your lender will want to see that you take in enough money to service your debt.
- Collateral: It’s not hard to find unsecured lines of credit these days, but having assets you can put up as security will increase your options significantly. Additionally, secured lines of credit often have better terms and rates.
3. Look For Lenders
Once you have a sense of your borrowing health, you can get a better understanding of where you should focus your search for a lender. A wide variety of lenders offer lines of credit. Let’s take a look at some of them.
- Banks: If your business is healthy enough to qualify for a line of credit from a bank, this will be where you want to start. Banks offer several variations on lines of credit, often with competitive rates and fees.
- Online Lenders: If your credit score isn’t too hot, or if you need to open a line of credit in a hurry, online lenders may be able to help you. Not every online lender will offer lines of credit, but they’re common enough that you should be able to find a few that fit the bill. Expect higher rates than you’d get with a bank.
- Credit Card Issuers: These may be banks, retailers, or other companies dealing with point of sale transactions. There’s a pretty good chance your mailbox is full of offers for credit cards as we speak.
- SBA CAPLines: The SBA offers four types of lines of credit to qualified lenders. These have credit limits up to $5 million. Each type has conditions on what the funds can be used for.
4. Complete Applications
To get a line of credit, you will, of course, have to fill out an application. What your application will look like will vary depending on the type of line of credit you’re applying for and the lender you’ve selected.
Online lenders and even some banks offer the convenience of a digital application. Some banks, however, will require you to come into their branch personally and fill out forms. Credit card applications come in all types of forms; you can apply for them in person at banks, fill out applications online with providers, or return forms sent with your mail offers.
You’ll also want to get any documentation that you might need to send to your lender in order. Requested documents may include:
- Basic information about your business
- Tax returns, business and personal
- Bank statements, typically the last three months
- Personal ID
- Balance sheets
Frequently Asked Questions
Here are some of the questions we often see asked about business lines of credit.
I am starting a business. Can I get a line of credit?
Yes. In fact, there are lines of credit that are designed with startups and other new businesses in mind. And remember, even if your business doesn’t qualify for a line of credit, you may qualify for a personal line of credit that you can use for business expenses.
I have bad credit. Can I get a business line of credit?
Bad credit isn’t the game-ender it used to be. While you may have a hard time qualifying for a credit line from a traditional bank, many online lenders offer them to businesses with weak credit. Start your search by checking out our favorite lines of credit for bad credit.
How hard is it to get a business line of credit?
That depends on the lender. If you don’t care about rates and terms, not very hard at all; finding one that works for you, however, may take a little work.
How long does it take to get approved for a line of credit?
It can take anywhere from a day or two to several months. As a general rule, online lenders are faster than banks, which are faster than the SBA. For credit cards, you’re looking at seven to 10 days in most cases.
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 line of credit. Ready to start looking for a small business line of credit? Head over to the Best Business Lines of Credit for 2019. If you’re in the market for a business credit card, we can help with that too.