Did you know most business owners seek after the small business line of credit today, according to the Federal Reserve System? Small business line of credit account for 43 percent of all applications in America. The reason is that such a business line of credit gives your company a revolving line per your needs. Some loans have a higher risk, while others have a lower overall cost.
Actually, a business line of credit gives small businesses access to short-term loans.
These loans are easier to get and are processed faster than the speed and bureaucracy of obtaining loans from the banks. Hence, companies are leveraging these funds to pay expenses and purchase inventories. But just what is a business line of credit? Here is a detailed guide on the same.
What is a Business Line of Credit?
Before you look for the best business line of credit, it would be wise to understand what a business line of credit is.
A business line of credit is an adaptable and more affordable loan for a business of any size. This loan enables companies to borrow a certain amount of money when needed. A business can borrow the loan in a lump sum or take smaller amounts until the loanee takes up the entire piece. Furthermore, business lines of credit can either be unsecured or secured.
The secure business line of credit requires the business borrowing the loan to use its assets as collateral for the loan. So, should a business fail to repay the loan, the lender can sell off the business assets and get their money back.
Unsecured business lines of credit, on the contrary, do not require collateral. You’re all smiles with this, right? The catch with the unsecured business line of credit is that they have a lower credit limit. In some instances, the interest rate of the unsecured business line of credit is higher than that of the secured one.
What makes business lines of credit stand out is that the loanee can access the funds through its mobile app or a business account. Again, unlike term business loans or traditional loans, business lines of credit are renewable. As the loanee repays the loan with interest, the lender refreshes the credit amount available. This explains why a business line of credit can take years or months to gain approval.
How a Business Line of Credit Works
A business line of credit has a smaller loan amount than that you get from your traditional bank. But, the funding of these loans is swifter than that of conventional banks.
Some financiers can approve your loan in just a single business day. As for the interest rate, the lender will determine it using your time in business, annual revenue, and your credit score. Fees associated with business lines of credit include an origination fee at your first application, a yearly fee, a monthly payment on your account, or a maintenance fee and draw prices, which you pay when you pull out a specific line of credit.
Get Your Business Line of Credit in Simple Steps
The first step should be deciding how much money you need. Different lenders have specific loan amounts, although the quantity typically ranges between $2,000 and $250,000. But look, you can ask for the highest limit as your lender doesn’t charge your interest rate based on the amount you borrow. You’ll pay the interest based on what you use.
After receiving your initial credit line, you can always request an increase if you need more money. Your lender will consider your credit history and business revenue to approve or decline this adjustment. Some lenders will ask for collateral upon your request for an increase.
Once you’ve discussed with your team and agreed on the amount you need, it’s time to do a personal check to confirm that you are eligible for a business line of credit. Ensure your credit score is 680. A higher credit score translates to a better chance of getting a higher loan and lower interest rates.
Think about your business revenue. Most lenders only loan businesses with specific monthly or annual income. While this minimum amount varies, it is often between $10,000 per month to $250,000 annually. However, online lenders have less stringent requirements.
How long have you been in business? Most lenders loan businesses that have been in business for a year or more. Some online lenders can loan you with just six months of being in business. Companies that have been in business longer are more likely to be funded. They also stand a high chance of enjoying lower interest rates and higher loan amounts.
After ticking all four boxes, it’s time to identify and compare different lenders. Consider such elements as maximum credit limits, APR ranges, repayment terms, and minimum requirements to choose an ideal lender. You can apply your business line of credit through online lenders, credit unions, or your regular bank. Next, gather all the necessary documentation in preparation for the application.
Collect your business lease, business plan, financial statements, articles of incorporation, business licenses, profit and loss statements, business and personal tax returns, and your business and personal bank statements.
Once you have all these, it’s time to submit your application; the submission could be physical or online, depending on the lender. The turnaround also varies by lenders, and sometimes your lender could ask for extra documentation, so be open to that if it happens.
Conclusion
A business line of credit can be a perfect solution for a consistent capital flow to your business. That’s not to say it doesn’t come with risks—higher rates, fees, and shorter repayment periods are some of the challenges some applicants complain about.
Accessibility, increased cash flow, and a good relationship with lenders are some benefits not mentioned above, but you enjoy them with business lines of credit.
So, do your thorough research and choose the best business line of credit.
Thank you,
Glenda, Charlie and David Cates
