Business Line of Credit
What is a Business Line of Credit?
A business line of credit is a revolving loan that allows access to a fixed amount of capital.
A line of credit can be a valuable tool to fulfill short-term financial needs. Some businesses use a line of credit to fuel growth and to fund revenue generating projects. Businesses can use a line of credit to finance short-term working capital requirements.
A business line of credit is different from a business loan. With a loan, you need to make regularly scheduled payments to repay the loan. With a line of credit, you only pay when the business draws from the line. Interest is only charged when you pull money from the line of credit.
When Should You Use a Business Line of Credit?
If your business regularly needs access to funds in order to meet short-term capital needs to manage your business’ day-to-day capital needs then you may want to consider applying for a line of credit.
A new business with no credit profile or a business owner with a low credit score will more than likely have a difficult time being approved for a line of credit.
Most lenders/banks will offer a line of credit to businesses with established credit profiles and businesses with a track record of revenue to be able to support the flexibility of a line of credit.
Here are a few ways you may use a business line of credit:
- The business has seasonal fluctuations
- A line of credit would help you during a time of low sales
- Your clients take an extended period of time to pay for your services/products
- You need credit to cover expenses for a project
- You need credit to cover marketing campaigns to increase profits
How To Apply for a Line of Credit
To apply for a business line of credit, most banks/lenders will want to see your business’ financial records that demonstrate your credit worthiness.
Online lenders and traditional lenders may differ in the type of documents you must provide. It is recommended to meet with your lender to determine what documents and records will be required. When speaking with the lender, you should be prepared to discuss your business’ financial position. Lenders may not offer you a line of credit for a startup company, to cover losses, or to meet expenses that will not lead to profits.
To show your lender that you are qualified for a line of credit, you will want to make sure that your business is profitable, you understand the financial responsibilities of a business, and the business has a plan for the line of credit and has the ability to make payments.
Once approved for a line of credit, make sure you understand the terms and qualifications.
There are two types of business line of credits.
1. Secured Line of Credit – This type of line of credit requires the business to put up a specific asset as collateral to secure the line of credit. Lines of credit are typically short-term and therefore most lenders only ask for short-term assets. This could be accounts receivable or inventory.
Most lenders will not typically require access to capital assets or property to secure a line of credit. If the business/borrower is unable to repay the line of credit back, the lender then becomes the owner of any assets that were used as collateral and they typically will liquidate the assets to pay off the balance of the loan.
2. Unsecured Line of Credit– This type of line of credit does not require any assets to be used as collateral. More than likely, a lien and personal guarantee will be needed.
To be approved for an unsecured business line of credit, the business will probably need a stronger credit profile. It is possible that interest rates may be a little higher for this type of line of credit. The approval limits are also often smaller.