Your Guide to Understanding Business Lines of Credit
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What Is a Business Line of Credit?
Lenders Who Offer Business Lines of Credit
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, which may be helpful if you anticipate needing access to funds for cash flow and small business expenses over a longer period of time. 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 than short-term options.
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
How Can a Business Line of Credit Be Used?
Payroll Rent Operational expenses Inventory purchases Repairs and supplies Marketing Cash flow gaps as a result of seasonality or unpaid invoices
How to Apply for a Business Line of Credit
1. Determine if Your Business is Eligible 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. Good credit is typically that over 660. If you have no credit or weak credit, you may still be able to get a business line of credit from lenders who offer bad credit business loans and lines of credit. Revenue: Lenders will typically assess your business 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 and/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 personal stake in the success of your company. Collateral: As mentioned above, collateral can be helpful in getting secured lines of credit with higher credit limits and lower interest rates. While not all lenders require collateral, you may find it easier to qualify for a business line of credit if you have assets to offer as security.
2. Gather the necessary documentation
Bank statements: Lenders usually want to see past bank statements for your business account to ensure that you are creditworthy and able to repay the line of credit. Some lenders may want only a few months of statements, while others, like traditional banks, may want up to one year of statements. Personal identification: Lenders need to verify your identity, which may include a driver’s license, social security number, education, criminal record, and proof of your full legal name. Business financial statements: These may include P&L sheets, cash flow sheets, and balance sheets Tax returns: Some lenders may want to see your tax returns, both personal and business, to assess eligibility. It’s helpful to have up to three years of returns. Proof of collateral: If you are seeking a secured business line of credit, you may need to provide documentation that shows you have the collateral available. If you are applying for an unsecured business line of credit, you will not need proof of collateral.
3. Compare lenders and business line of credit options
Traditional bank: Traditional banks are popular choices because they typically offer favorable interest rates and business loan terms. It can also be more challenging to get approved because banks often prefer a long business history and significant revenue. If your business has an established relationship with a bank, that’s a good place to begin your search for a business line of credit. Credit union: You can also compare rates and terms at a credit union, which may offer lower rates due to their business structure, which is supported by its members. They are also tax-exempt and required to reinvest their profits back into their programs as opposed to paying shareholders or increasing profit like a bank. Online lenders: If you need a business line of credit quickly and don’t have the credit or financial records required by a bank, an online lender may be a good option. Typically, you’ll be required to fill out an application and can usually expect to hear back within a few days. Keep in mind that online lenders may have higher interest rates and lower credit limits.
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 small percentage of the total loan. Late fees: If you’re late on payment or miss it completely, you may be charged a late fee. Check with your lender for their specific late fee amounts and policies. Annual fees: Some lenders may apply annual fees that vary depending 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 that is 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. Check with each lender to see if they have these fees and what they are. Termination fees: Check with lenders to see if they 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, which are typically a percentage of the loan principal. When it comes to business lines of credit, you will also find that some lenders don’t penalize for early repayments.
Additional Financing Options
Invoice factoring: Invoice factoring uses unpaid invoices as collateral to receive a cash advance from your lender. Inventory financing: Used to pay for products that will be sold at some time in the future. The inventory acts as collateral for the loan. Equipment financing: Used for the purchase of machinery, vehicles, or other business-related equipment. SBA loans: 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 (not business credit). You may be able to use a personal loan for business purposes, however, some lenders prohibit it. Commercial real estate loans: For the purchase of a building for business use such as office space, a retail shop, or any other commercial function. Business credit cards: Similar to small business lines of credit, these are great for short-term business needs. Business credit cards use a revolving line of credit with interest only charged on unpaid balances from previous billing cycles. Online loans: Online lenders offer similar loan options as traditional banks, but typically have a faster approval process and may offer more options for people with lower credit scores.
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