In any industry, many growth opportunities need proper financing to become a reality. However, not all small businesses can apply for a traditional loan.
That’s where a business line of credit comes in. It’s one of the funding options that can provide you with the working capital you need for your projects.
Here’s everything you need to know about applying for a business line of credit and how to make the most of this finance option.
What is a Line of Credit?
A line of credit is a loan type that gives you access to a specific lump sum you can withdraw and use for your business expenses.
Then, you simply pay interest and other fees on top of your withdrawals. It’s one possible way to improve your cash flow and it could help your business grow.
These are generally offered to small businesses with a strong record demonstrating their ability to pay back their loans. Companies check your accounts receivable ledger to determine the best amount they can offer you.
It provides flexible access to money, allowing you to borrow or withdraw funds depending on your needs.
Unsecured Small Business Line of Credit
An unsecured business line of credit requires NO COLLATERAL to get approval. Instead, it looks into your business’s performance to see if your revenue can handle a potential loan.
Established businesses often prefer a secured line of credit facility. Asset security can provide lower interest rates and reduced risks compared to other options.
Line of Credit vs. Term Loan
A term loan is a typical alternative to a business line of credit. It gives you the whole sum in one go, and you’d have to pay it back within a specific time.
Line of credit facilities are more short-term and usually cover more minor aspects of businesses, like day-to-day expenses during slow days, equipment repairs, etc.
They also have secured options for larger loans to help finance more significant business projects.
While it can be a valid business funding solution, it’s an unsecured option that can have a higher interest rate than your average short-term loan.
Line of Credit vs. Credit Card
While a business line of credit loan is often compared to a business credit card, they have notable differences that set them apart.
Credit cards are almost always unsecured with high-interest rates.
On the other hand, lines of credit have secured options that can have lower interest, allowing you to withdraw more cash.
How Does a Line of Credit Work?
You might wonder how to get working capital from your line of credit.
Here’s a crash course on how a business line of credit works and how to secure one.
Common Uses of a Line of Credit
They’re usually great for covering the expenses of your business, especially during periods of seasonal fluctuations.
They can also help with daily inventory and paying the bills.
How to Get and Keep a Line of Credit
Getting a line of credit is pretty straightforward, especially with online lenders. They will simply need your business statements:
- Balance sheet
- Income statements
- Bank statements
They usually prefer businesses that have been earning for a few years and have proven their ability to repay debts.
Once approved, you can withdraw the cash as you need. It usually takes a business day to get approved.
Have all the necessary fees paid on time to retain and renew your credit facility once your contract expires.
Line of Credit Fees and Costs
Once you have an approved business line of credit, payment is automatically debited to your preferred account.
Additional costs for late payments, opening, renewal, and maintenance also exist.
Line of Credit Repayments and Renewals
Repayment for a business line of credit doesn’t require the whole sum. Instead, there’s a monthly minimum to maintain.
After the 12-month term, you need to resubmit the requirements for a new assessment to renew your line.
If it’s closed, you must pay off the remaining balance.
Advantages of a Line of Credit
While there are many options for a small business looking to borrow funds, there are numerous reasons why a line of credit is a go-to for generating funds.
If you’re thinking of applying for a credit line, you can consider the following benefits:
- Accessible: These loans provide quick access to funding, especially for businesses that don’t have the earnings history, business assets, or credit score to help them qualify for traditional bank loans.
- Emergency Cash: This loan provides easy access to the money needed to pay for unexpected expenses, especially since this finance option is constant for a specific amount of time based on your contract.
- Constant Cash Flow: During the loan term, you can have a revolving line of credit that allows you to constantly access money as long as all fees and debts are paid on time.
- Upgrade Your Business: These loans can help you purchase inventory, equipment, and everything your business might need to stay on top of the game.
- Flexibility: While there are monthly repayments, you can easily cover whatever is due based on your cash flow and what would best benefit you.
Risks of Over-using a Line of Credit
While these business loans are a great way to have working capital, they can also cause problems to your business finance structure when not managed properly.
Overusing it could cause problems with your cash flow and potentially damage your credit score.
Remember that a credit line is a debt with additional fees and interest rates that grow, especially if you constantly have unpaid invoices.
Where to Apply for a Line of Credit
Online lenders are the fastest way to apply and get credit approval with just a few clicks.
You may have more questions about applying for a business line of credit and its benefits.
We’ve gathered the most common ones below.
Do Banks Offer Lines of Credit?
Large banks are considered one of the most common traditional sources of business lines of credit.
They usually have more requirements for security, reviewing more than just your accounts receivable, loss statement, and similar documents.
They can require physical assets as collateral. They tend to have larger businesses as clients. As a result, you’re likely to have lower and more fixed interest rates.
Who Can Apply for a Line of Credit?
A business line of credit is open to most small businesses.
You can ask your local lender to see how you can get approved for these business loans.
A business line of credit can be a great short-term solution for any small business that needs to borrow cash and have a manageable way to repay it.
Contact your trusted lender for professional advice on setting up your business credit line.