Business Line of Credit

A business line of credit provides a business with capital to use as needed. It is more flexible than other loan types.

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What is a Business Line of Credit?

A business line of credit is a micro-business loan that is characterized by a lot of flexibility. With a business line of credit, you are free to withdraw funds until you reach a specific preset limit. Also, note that with this option, you only pay interest on the funds that you have used. 

What You Need to Know About Business Line of Credit

Although many businesses can access money from various lenders, getting a financier with flexible loan terms isn’t something straightforward. If you are looking for a facility that can give you the convenience of withdrawal and repayment, then go for the business line of credit.

If you are a small business owner, it is vital to note that a line of credit for your business can help you get funds for your business activities, such as paying bills, suppliers, and investment. 

How Does a Business Line of Credit Work?

A business line of credit is an arrangement between borrowers and lenders, whereby the former get access to a specific preset loan limit at their convenience.

Note that once this limit is set, you are free to withdraw any amount as long as you don’t exceed the limit. Moreover, bear in mind that you don’t have to use the entire loan limit; therefore, you only pay back what you have utilized.

It is crucial to note that a business line of credit works like a credit card. Bear in mind that once you spend some money, your credit is debited, and whenever you make payments, your limit goes up. Note that with a business line of credit, you can save on interest costs if you make an early payment of your balance.

How Do You Get a Line of Credit for Your Business?

For you to qualify for a business line of credit, most lenders require that you should have an account statement with excellent cash flows and with at least two years of financial record.

In case you are applying for a small line of credit, you may not require any collateral. However, more significant limits require that you provide guarantee, such as title deed, before the facility is approved.

With traditional lenders, such as banks, applying for this facility requires the following documents – business and personal tax returns, bank statements, and the financial statements for your business. However, online lenders demand fewer requirements than banks, but they offer lower loan limits with higher interest rates.

Types of Business Credit Lines

As a business person, sometimes you may experience liquidity challenges due to delayed payments from your customers. In such circumstances, a business line of credit is one of the best options you can explore to manage the situation. 

Before you use a line of credit, it is essential to understand their features. The following highlights different lines of credit.

• Secured Line of Credit

Before you get a secured line of credit, you have to put up collateral, such as business assets or land, as a guarantee that you will not fail to pay. In case you default on your repayment, the lender has the option of disposing of your asset to offset the loan.

A secured line of credit has a lower risk, and it is characterized by favorable terms, such as lower interest rate, flexible repayment, and higher loan amount.

• Unsecured Business Line of Credit

An unsecured business line of credit doesn’t require you to put up any asset as collateral. With this facility, the approval time is shorter, but the interest rate is a bit higher. It is vital to note that the unsecured line of credit is offered based on the borrower’s creditworthiness, and its application process is straightforward. 

• Real Estate Line of Credit

A real estate line of credit is an ideal financing option for entrepreneurs in the real estate business. For this type of loan, the application takes a short time; hence it is suitable for getting immediate cash. 

Through a real estate line of credit, you can invest in many properties with the same facility. Getting a real estate line of credit is more comfortable because it doesn’t require collateral, upfront fees, and documentation.

It is crucial to note that a real estate line of credit can offer you the flexibility to invest in any property without being tied to any particular type of property.

• Business Credit Card

A business credit card is an unsecured facility that can help you finance your business needs with flexibility. Also, note that when using a business credit card, you can get rewards such as cashback and discounts, especially after getting hotel services.

Benefits of Using a Business Line of Credit

The following are the benefits of using a business line of credit

• Business Credit Rating

Excellent use of your business line of credit can help you build an acceptable credit rating and make you qualify for better credit terms

• Smooth Running of a Business

With a business line of credit, you can get immediate cash to pay your bills and to cater for your new investments.

• Inconsistent Cash-Flows

If income from your businesses fluctuates seasonally, a business line of credit can be the best option for you. For instance, a line of credit can help you during the time when sales are low.

• Delayed Payments

A business line of credit can help you with immediate cash in case your clients take more than 30 days to pay for the services offered. 

What is a Revolving Line of Credit?

A revolving line of credit is one of the most flexible options for borrowing money for your business activities. With a revolving line of credit, you don’t have to get a fixed amount of loan at once, but you can gradually borrow small amounts until you reach your limit.

It is vital to note that under a revolving line of credit, you are supposed to make regular payments. Moreover, you are eligible to borrow again as long as your principal is paid. A revolving line of credit can help you manage the cash flow for your business.

How Are Interest Rates on Business Lines of Credit Determined?

It is essential to note that the flexible mode of repayments characterizes business lines of credit, and, therefore, you only pay interest on the amount you have withdrawn or used.

The interest rates charged vary from one lender to another, and it is based on several factors, such as the riskiness of the borrower. 

The following is a highlight of the common factors that your lender may use to determine the interest rate.

• Character
Character entails your behavior and reputation while undertaking your business activities. Lenders may establish your personality through your credit history or references. 

• Ability
Ability is your capacity to pay the loan you are applying for, and it can be determined from your revenue and past repayment history.

• Capital
Capital refers to the amount of money you are contributing as a down payment for the facility. 

• Collateral
These are the assets that you use to guarantee the loan you are applying for. For the secured business line of credit, the asset can be inventory or land. However, for unsecured credits, collateral might be a personal guarantee or lien on your account.

• Conditions
Conditions refer to the prevailing economic conditions that may affect lending. 

Where to Get a Business Line of Credit

It is crucial to bear in mind that a quite number of lenders who offer term loans can also advance the business line of credit. The following are some of the sources where you can get a business line of credit.

• Banks

You can apply for any line of credit with any bank. You need to be aware that the application process is long and characterized by strict requirements. Also, note that if your credit record is excellent, you will be charged a lower interest rate.

• Online Lenders

If your credit record is not adequate to convince the traditional lenders, then you can opt for online lenders. Applying for a business line of credit with online lenders is more accessible, but their interest rates are a bit higher.

Also, it is crucial to do due diligence before you settle for any online lenders since some of them are not credible.

• Small Business Administration (SBA)

Although SBA doesn’t give direct loans to clients, it guarantees the facilities offered by the approved lenders. This guarantee makes it possible for small businesses to qualify for credit on a long-term basis. 

Through SBA, you can get four types of credit, such as working capital, contract, seasonal, and builders. The interest rates for these lines of credit ranges between 7.5-10%, and you can get a credit limit of up to $5million. 

Advantages of Business Line of Credit

Business line of credit is one of the most flexible options you can use to get quick cash for business activities. The following are the advantages of using this mode of financing.

• Lower Interest Rate

Although the interest rate charged on a business line of credit is higher than that charged on term loans, it is a bit lower than that levied on credit cards.

• Enhanced Cash-Flow Management

In case you are dealing with inventories that take a while to convert into cash, a business line of credit can help you get fast cash to finance your activities.

• Can Help You Make Business Purchases

A business credit line can help you buy inventories for your business provided that you don’t exceed the limit, and you are willing to pay within the stipulated timelines.

However, due to its high-interest rate, a business line of credit is not the better option you can use to finance a property or pay employees. 

• Emergency Money

A business line of credit can help you during the time you are experiencing financial constraints. However, you must use it wisely in financing your business requirements.

• Ability to Repay & Borrow Again

With a business credit card, you can offset your loan balance and proceed to acquire again as per your requirements.

• Enhance Business Adaptability

A business line of credit can help you spend money on a business opportunity that is being offered at favorable terms. For instance, if a particular supplier is selling inventories at a discount, you can take advantage and make payments through your line of credit.

Disadvantages of a Business Line of Credit

Although several benefits characterize a business line of credit, it has cons, as explained below.

• Extra Charges & Fees

Even though a business line of credit is user-friendly when it comes to flexibility, frequent withdrawals can lead to extra charges. 

The fee charged varies from one lender to another, and it is based on other factors.

When looking for the best lender, carry out thorough research, and compare charges so that you may save on cost. 

• Difficult Qualifications

Application for a business line credit requires documentation, such as business tax returns, personal tax returns, financial statements, bank statements, and many more. Also, you must have at least two-year experience in running your business.

• Prone to Misuse

A business line of credit should be used only to finance cash flow shortages. Therefore, it is advisable not to use it to pay for your necessities outside your business. Also, in case you already have huge debts, don’t go for it.

• Low Limits

Unlike other credit options, a business line of credit associated with low borrowing amounts. Therefore, it is not appropriate to invest in a new project or purchase of equipment.

Final Thought on Business Line of Credit

A business line of credit is a loan facility meant to help businesses finance their operations. For a borrower to use this service, the lender has to create a limit.

Therefore, you can only withdraw up to the set threshold. With a business line of credit, you are free to use small amounts of money and pay interest only on what you have spent.