Your Guide to Understanding Business Lines of Credit

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What business lines of credit are How business lines of credit work Business LOCs associated costs Types available How you can use a business LOC How to apply for a business line of credit Alternatives to business LOCs
What Is a Business Line of Credit?
How Does a Small Business Line of Credit Work?

Repayment Options for Business Lines of Credit
Short-term repayment plans typically span 6 to 12 months. Because the repayment period is shorter, the interest rates may be higher, but you could end up paying less overall compared to a long-term line of credit. Additionally, if you’re short on time, applying for a short-term line of credit with an online lender may yield a faster turnaround time compared to long-term lines of credit.
Long-term repayment plans can exceed 12 months. Because the lender takes on more risk with a long-term line of credit, the application and approval process for these business lines of credit may be more rigorous. May be helpful if you anticipate needing access to funds for cash flow and small business expenses over a longer period.
Costs of Using a Small Business Line of Credit
Interest Rates
Annual Percentage Rate (APR)

What Fees Apply to a Business Line of Credit?
Origination fees: Lenders may charge a fee for processing your business line of credit application. The origination fee may cover other costs, like underwriting and processing fees, and is usually a percentage of the total loan. Late fees: If you’re late on a payment or miss it completely, you may be charged a late fee. Annual fees: Some lenders may apply yearly fees based on the amount of your line of credit. For example, if you have a maximum credit limit of $25,000, you may have an annual fee less than if your line of credit was over $25,000. Cash advance fee: Some lenders may apply a fee if you ask for a cash advance, which may be a flat rate or a percentage of the cash advance. Upfront and renewal fees: Your lender may charge these fees when you apply for a new line of credit or renew an existing one. Termination fees: Some lenders charge a fee for ending your line of credit before the full term is over. This is typically a percentage of the line of credit. Prepayment fees: If you pay down your balance early, some lenders may charge prepayment fees, typically a percentage of the loan principal.
Lenders Who Offer Business Lines of Credit
Difference Between a Secured and Unsecured Business Line of Credit
Secured Lines of Credit
Unsecured Lines of Credit
Revolving vs. Non-Revolving Lines of Credit
Revolving Line of Credit
Non-Revolving Line of Credit
How Can a Business Line of Credit Be Used?
Payroll Rent Operational expenses Inventory purchases Repairs Supplies Marketing Cash flow gaps
How to Apply for a Business Line of Credit
1. Determine if a Small Business Line of Credit Is Your Best Option
2. See if Your Business Is a Good Candidate for a Line of Credit
Credit score: Check your personal and business credit scores. The higher your score, the better options you may have regarding credit limits and interest rates. Revenue: Lenders typically assess your monthly and yearly revenue to determine how capable you are of paying back your line of credit. If they see consistent growth, they may be more likely to lend to you or increase your line of credit. Personal investment: Lenders may also look at what you have invested in the business because it shows that you have a personal stake in your company's success. Collateral: Collateral can help get secured lines of credit with higher credit limits and lower interest rates. Age of business: Lenders often prefer established companies — the longer you've been open, the better your rates, terms, and possibility of approval may be.
3. Compare Lenders and Business Line of Credit Options
Traditional banks: Traditional banks typically offer favorable interest rates and business loan terms, but they often prefer a long business history and significant revenue. Credit unions: Credit unions may offer lower rates due to their business structure, which their members support. They are also tax-exempt and are required to reinvest profits back into their programs. Online lenders: If you need a business line of credit quickly and don’t meet typical qualifications, an online lender may be a good option. However, online lenders may have higher interest rates and lower credit limits than other possibilities.
4. Gather the Necessary Documentation
Personal identification: Lenders need to verify your identity, which may include a driver’s license, social security number, and proof of your legal name. Business financial statements: Any financial statement you can think of that may be required, including bank statements, balance sheets, tax returns, projections, and more. Business plan: While business plans are typically associated with grants, some line of credit lenders may want to see them, too. Legal documents: All proof that your business operates according to local, state, and national laws, such as business licenses, may be needed. Proof of collateral: If you want a secured business line of credit, you may need to provide documentation that shows you have the collateral available.
5. Apply for a Small Business Line of Credit
Alternate Financing Options to a Business LOC
Invoice factoring: Invoice factoring uses unpaid invoices as collateral to receive a cash advance. Inventory financing: This is used to pay for products to sell in the future. The inventory acts as collateral for the loan. Equipment financing: This type of financing pays for machinery, vehicles, or other business-related equipment. SBA loans: These loans are backed by the U.S. Small Business Administration and offered by banks and approved lenders. Personal loans: Personal loans are based on your personal credit history. You may be able to use a personal loan for business purposes, but some lenders prohibit it. Commercial real estate loans: These loans purchase buildings for business use. Business credit cards: Business credit cards use a revolving line of credit with interest charged on unpaid balances from previous billing cycles. Online loans: Online lenders offer similar loan options to traditional banks but typically have a faster approval process and may provide more opportunities for people with lower credit scores.
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Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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