Business Line of Credit

Jason Smith

Jason Smith

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Jason Smith

Senior Author

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If you’ve started a new business, you’ve probably used a combination of different funding techniques to get yourself off the ground. Traditionally, you’ll need multiple sources of finance to get the ball rolling. Some people may be fortunate enough to be able to fund some of the initial expenses themselves, but once expensive machinery or inventory is needed, getting some form of loan will most likely be necessary. At this point, a business loan calculator can be helpful. The most popular forms of finance for when a business first starts tend to be term loans or startup business loans. These loans are typically secured against assets and are paid back over a set time period – they also tend to have low interest rates because they are backed by collateral.

Business Line of Credit

But once you start a business you will have different forms of financial needs. You may run into an emergency or find that you have an opportunity that you could take advantage of if you had the right capital. That’s why having a revolving form of credit is a good option for you. It allows you to access capital at extremely short notice without having to fill in additional applications. Common forms of revolving credit include credit cards and lines of credit. Both of these have become commonplace in many businesses.

Credit cards come in handy in case you need funds for any type of business purpose. A business line of credit serves a very similar purpose. One of the primary differences is that this type of business loan gives you access to cash immediately—minus the hefty fees your bank might charge you if you use your credit card for a cash advance. This page will overview what a business line of credit is and how it could potentially help your business operate more efficiently.

Contents

What is Revolving Credit?

Revolving credit is a type of lending that differentiates itself from traditional loans and debt instruments. With a traditional term loan, a bank will give you a certain amount of money at an interest rate that will need to be paid back over a set period of time (term time). With revolving credit, a bank extends you a credit limit, which is effectively an amount of money you are allowed to borrow if you want. You only pay back interest on the money that you access from your limit. In addition, this form is typically unsecured, which makes it a less risky form of capital for a business who doesn’t want to put assets up for collateral.

Revolving credit is typically employed by a company to have in case of an emergency, or to cover gaps in cash flow that may arise due to various reasons. Many companies don’t ever use their lines of credit – because you don’t pay interest on what you don’t use, it is considered a risk-free form of credit. As mentioned previously, the two forms of revolving credit that are available to business owners in the United States are lines of credit and business credit cards. There are distinct differences between these two forms of finance that you can read about below.

 

Brief Background

When you have a business line of credit, you need not worry about unexpected expenses that can damage your company’s budget or your working capital. As mentioned previously, its function is very similar to that of a credit card. However, instead of using a credit card for a specific purchase, you can withdraw cash that you can use for a variety of purposes.

The usual qualifications to be get approved for a business line of credit is that your company should have been running for over 6 months with over $50,000 in annual revenue. More often than not, your local bank offers this type of small business load; however, if you get disapproved or you prefer going through the process quickly, there are plenty of online lenders available to help you out.

You can have as little as $10,000 or as much as $1,000,000 on your business line of credit. Terms can last from 6 months to 5 years with interest rates ranging from 7 to 25%. The best thing about a business line of credit is that you can get approved in as quick as 24 hours.

Even better, even if you have a low credit score, you have the chance to get approved for a business line of credit. You can even use your business line of credit to build your credit score.

Business Line of Credit Basics

As much as we want to take control of everything that happens in our businesses or even in our life in general, there are things that can happen unexpectedly. No matter how meticulous you were in planning every aspect of your business, there can be times when you will realize how helpful it will be if you had somewhere to seek for help or assistance.

A business line of credit is exactly what you need if you want a “back up plan”. For example, one of your clients failed to pay you back on time and the due date for your bills and your employees’ salaries are fast approaching. Without having to touch your company’s working capital or your personal bank account, you have a business line of credit where you can borrow cash.

The best part about it is that you can do this repeatedly without having to go through the rigorous, not to mention time-consuming, process of applying for a brand new loan.

Basically, a business line of credit is a simple loan that remains flexible through time. You only pay for what you get. To help you understand this better, allow us to provide you with a simple example:

You were given the allowance of $50,000 on your business line of credit. You borrowed $15,000 one day. While you are still in the process of paying back that $15,000, you can still borrow the remaining $35,000 or less than that balance—you don’t have to use up the entire $50,000. That’s pretty easy, right?

Just in case you’re curious, the primary differences of business line of credit from a traditional term loan is that a business line of credit usually have higher interest rates. However, the moment you make a late payment, interest rates get even higher. The advantage of term loans is that the interest rate remains regular throughout the entire loan duration.

 

Get the Flexibility You’re Looking For

Having a traditional loan is sometimes too restricting and this isn’t just because small business loans are often stipulated to be spent on specific things. On top of this, term loans have to be paid back with interest even if you don’t end up using the loan. This means that if you think you may purchase something, but don’t end up purchasing it, you still have to pay all the interest and fees on the loan. This can be tough for someone who needs to respond to a situation quickly.

With a line of credit, you can apply for the line of credit in advance and never use it until you need to. This way if an opportunity arises, or something stops working, you can fund the payment without having to apply for the exact amount of money through a lender. It saves time and money, and means that you have the ability to respond to situations quickly. One of the most important factors in the success of a business is how well they can respond to emergencies – a line of credit can help you do this. In addition, you may work in an industry that has seasonal gaps in cash flow. You can use a line of credit to pay rent, bills, and other expenses that you may have during slow season.

 

Common Uses of Business Lines of Credit

Business lines of credit are used for a range of different things by business owners. Below are some of the most common forms of use for business lines of credit:

  • Inventory Investment – If you work in retail you probably find that different times of year require different amounts of inventory. A business line of credit can help you invest in seasonal inventory. It’s a great way to make sure you can accommodate fluctuations in your business.
  • Staff – A business line of credit can help you bring on short terms staff to alleviate stress during season increases in business.
  • Equipment Financing – A business line of credit is often used to quickly replace or repair equipment that is needed to help a business run effectively. Read more about equipment financing options.
  • Cash Payments – A business line of credit is used to pay bills that are discounted when paid for in cash.
  • Offseason Rent and Bills – If you work in the travel or entertainment industry you may find seasonal gaps in cash flow make it hard to cover costs year-round. Business lines of credit are used to help reduce this stress.

Are You Qualified to Get a Business Line of Credit?

Most businesses are qualified to get a business line of credit. We already told you about how your business should be running for at least 6 months — fairly new small business can get approved too.

Even bad credit scores are accepted. You must know though that collateral may be required and if you do have a low credit score, you can expect higher rates.

Once you already have your business line of credit, it will be easy to withdraw cash for any purpose. However, it is best to always update your documents, as newly updated documents are usually required every time you need additional withdrawals.

We also mentioned how you can use your business line of credit to build your credit score. If you are not qualified for other loan types simply because you have bad credit, you can get a business line of credit for now and use this opportunity to make your credit score higher. Just ensure that you make payments on time to avoid pulling down your credit score even lower.

It is good to note though that short-term lines of credit are ones better fit for newer businesses and those with bad credit. A medium-term line of credit is usually the product offered to those with a good credit standing and a well-established history of finances.

As always, you need documents such as your identification, business and personal tax returns, balance sheets, bank statements and other possible paperwork in order to apply.

 

Credit Score: Put Yourself in Position

As discussed above, your business credit score will be used as a factor in determining your ability to pay back your business line of credit. In addition, your personal credit score can sometimes also be used to assess this – this is especially true if your business hasn’t been in operation for a long time. This is why it’s important to make sure that your personal credit score is in the best condition possible prior to apply for a loan – the same goes for your business score.

Your personal credit score is compiled of various factors, but the two factors that are easy to change if you need to improve your score quickly are outstanding debts and errors. In terms of outstanding debts, if you have a lot of credit card debt at the moment, or any other form of debt, paying this off will have a serious impact on your credit score. Each month your credit card lender will send a report of your balance to the different credit reporting agencies.

 

Other Important Facts About Business Line of Credit

Renewability – This is the first and most important advantage of a business line of credit. You can withdraw funds more than once even while you’re still in the process of paying back. Even better, you only pay for interests based on the amount you withdrew, not the entire amount of your business line of credit.

Use it for any purpose – You don’t have to explain where and how you will spend the money you will withdraw from your business line of credit each time. You can use it for practically any business purpose from payrolls to business expansion to purchase of supplies or equipment and many more. Many traditional term loans

Might just be better than your credit card – You might think that you can probably just settle with your credit card so you won’t have to borrow from a lender. Truth be told, business credit cards, more often than not, have higher interest rates. They also charge a whole lot of fees if you get a cash advance and even balance transfers! Credit cards also ask you to pay monthly while you can set up a different payment method for your business line of credit.

You only pay for what you use – If you get a term loan for say $10,000, whether or not you end up using this amount, you still have to pay for it and all the interest and fees that come with it. On a business line of credit, you only have to pay the interest of the amount you withdrew. So, if you got $10,000 from your $50,000 business line of credit, you only have to pay interest rates of the $10,000.

 

Business Line of Credit vs. Business Credit Card

Because business lines of credit and business credit cards are both forms of revolving credit, they’re often compared to one another. There’s no reason that you can’t have both in your company, but it is important to understand how they differ.

Business credit cards charge outrageous fees for cash advances, that’s why they’re not a good form of lending for someone who needs cash. But credit cards offer the advantage of having a card to pay for things with. Credit cards also typically have higher interest rates. One benefit that credit cards offer than many lines of credit don’t is rewards. Many business credit cards will allow you to accumulate air miles or get cash back for spending on the card. Having a line of credit will not provide you with any of these advantages.

 

Drawbacks to Consider

There are a number of great things associated with getting a business line of credit, but it is important to note that there are also some aspects that may make this a form of finance that isn’t right for you. The following drawbacks should be considered prior to making a decision on a personal line of credit:

  • Annual Fee – One of the best things about revolving credit is that you don’t have to pay any interest on what you don’t borrow. But many lenders will still charge you an annual fee in order to make sure they benefit in some way from the credit limit they’re extending to you. Make sure to ask the various lenders you contact whether or not they have annual fees on their lines of credit.
  • No Card Facility – Many vendors and retailers these days accept card as payment. This means that having a credit card at your business is a good way to smooth out transactions you may have to make. With credit lines, you typically withdraw cash or transfer money, this may be a bit more difficult in the modern world depending on the industry that you’re working in.
  • Can Be Bad for Credit Score – If you carry a balance on your line of credit, this can be bad for your credit score over time. This is especially true if you happen to have too much outstanding revolving credit. If you want to apply for a different loan in the future, a lender may look unfavorably at you if you have a too much revolving credit available.
  • Hard to Be Disciplined – If you find it hard to be disciplined it may be difficult to have a business line of credit. People who have business lines of credit can quickly get themselves into perpetual debt. This is because the money doesn’t have to be paid back over a set period of time. If you want structure in your repayments, you’re better off getting a term loan.

Who Provides Business Lines of Credit?

Business lines of credit have been a lending product for decades – they’re one of the original forms of credit. For this reason, they’re traditionally given by banks. Many large commercial and consumer banks extend lines of credit to business owners every day. These lenders have a wealth of experience when it comes to assessing the financial eligibility of their clients – they also tend to offer very low interest rates. The only problem is that attaining finance from traditional lenders can be quite a lengthy process. Not only is this annoying, but it can also end up in you not having the capital you need by the time you need it. Going to a traditional bank will mean that you have to submit a range of different documents to prove that you’re a viable borrower.

Fortunately, if you want to cut down on these complications you can. Modern technology has opened the doors for hundreds of lenders to enter the market. This means that you can apply for loans directly online – you can even scan and upload all of your documents. This cuts down the amount of time it takes to get funding drastically, it also takes away the head ache of having multiple meetings and preparing lengthy documentation. Although as mentioned previously, it will come in at a higher interest rate.

 

Verdict

After taking in all the information on this page, you probably have a pretty good idea of what a business line of credit is and how it can help your business. With any financial decision, you should make sure to give yourself enough time to do proper due diligence on the money that you’ll be borrowing. Not understanding the type of finance you’re receiving can have dire consequences for the health of you company and the health of your business credit score.

One of the most important things to do when deciding on a lender is to read customer reviews online. You don’t want to make the mistake of going with a lender that has horrible customer service. Never trust a lender that doesn’t have a presence on multiple consumer watchdog groups. You should also make sure that you are fully aware of any fees. Unlike with traditional term loans, lines of credit tend not to have excessive hidden fees and charges. Regardless, they do often have annual fees that you should make sure you are aware of.

Most of all, explore your options. Owning a business is an exciting endeavor, you should view shopping around for finance the same way you would view an investment. You have the opportunity to make some great decisions that will potentially help improve the financial health of your company long into the future.

FAQ

The Basics

If you are new to using a business line of credit, this section will provide the information you need to know to get started. You can find a list of frequently asked questions to obtain more information on this topic.

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How to get a business line of credit?

Before you apply for one, make sure you evaluate your credit score. Your credit score will largely determine the type of line of credit that you can get for your business. Once you can determine what is the most suitable option for your business, you can shop and compare various lender options. Gather the documents you need to submit and send in your application. We talk about how to get a business loan more in depth in another article.

How does a business line of credit work?

A business line of credit is a type of revolving credit that you can access funds from, whenever your business needs it. It is recommended for businesses that require a boost in their working capital for a short-term period. You can also use it to cover for unexpected expenses.

What is a business line of credit?

This type of funding is available for businesses that want flexibility in terms of their spending. Unlike a regular loan, you can draw from the credit line any time you need extra funding. The best thing is that you will only be paying interest on the amount that you use. A certain limit is set on your business line of credit.

How to establish a business line of credit?

The following steps will help you establish a business line of credit: incorporate your business, obtain EIN, create a business bank account, provide business contact information, open a business credit file and credit card(s), and establish a line of credit with suppliers that you work with.

What is needed for a business line of credit?

Your business must be at least 6 months in operation and/or must have annual revenue worth $25,000. Most lenders won’t require a minimum credit score but a score of 500 or more seems to be the standard.

What is a business line of credit used for?

A business line of credit can be can be used for short-term funding needs for a business such as working capital or to cover the cost of unexpected expenses.

Why your business needs a business line of credit?

If you want flexibility in terms of your business funding, a line of credit is the best option. You will be given access to a certain amount but you do not need to use them all. You can only get funding for a certain amount you need for a specific purpose. You are therefore not obliged to pay back the full amount on your credit.

What is the difference between a small business loan and a line of credit?

A small business loan will give you a specific amount of money that must be paid back over a set period of time. But line of credit is a revolving credit, which means that you can tap into that line of credit to use for any purchases or to boost your working capital whenever you need it.

How to manage a business line of credit?

You must tap into your line of credit only when you need it and if there is a significant return. For example, when you need to purchase equipment that will in turn bring in more revenue for your business. You need effective cash flow management to maximize its use.

When to use business line of credit?

It depends on your business needs. This is the great thing about a business line of credit – you can tap to your funds when you need to make a purchase or cover expenses for your business.

Do I need a business line of credit when starting my business?

A business line of credit is just one of several funding options available for businesses. It is up to you to determine your business’ spending needs and decide if this is a better option than a traditional business loan.

How important is a line of credit to a small business?

A line of credit is most beneficial to small businesses. It provides flexibility in terms of obtaining access to funds you need to facilitate business operation based on your intended purpose, rather than taking out a lump sum (like business loans).

Application for Business Line of Credit

Do you need to apply for a business line of credit? In this section, everything you need to know about qualifying and the actual application process is listed.

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How to get a business line of credit for a new business?

You need to apply for credit in order to build your credit history as a new business. You might have to start with a small line of credit while you are trying to build up your credit. After that, your business can qualify for a more sizable line of credit.

How to qualify for a business line of credit?

The following are required when filling out application for a business line of credit: length of business operation (most companies will provide line of credit for businesses that are at least two years of age), revenue and profit report, financial ratios, personal credit, and guarantees (if any). If you’re looking for business loans for women or minority business loans then read our other more in depth articles about these topics.

How to apply for a business line of credit?

The specific steps for applying for a business line of credit will vary from one company to another. A personal credit check won’t be required but you might be asked to provide documents for more information on your business, especially financial documents.

How to get a business line of credit with bad credit?

If you have bad credit, set your expectations realistically. It is best to be honest about your credit situation. By being honest with your lender, they will give you the opportunity to present your business plan and have the opportunity to get funded through a business line of credit. Also read more about bad credit business loans in our other articles.

How difficult is it for sole proprietor to get business line of credit?

A business line of credit is not difficult to obtain even for sole proprietorship unless you have poor credit, or have several existing debts. Your ability to qualify is based on your personal credit history.

How to get approved for a business line of credit at Navy Federal?

You can get a business line of credit from Navy Federal if you are a business member. This is a must if you want to get approved. Once you are a business member, you can follow the steps for application at their website.

How long does it take Navy Federal to approve business line of credit?

Once the requirements have been submitted, it takes 2-3 business days for Navy Federal to provide feedback about the application for business line of credit.

How to approach a bank for business line of credit?

Most banks will offer a business line of credit, but not all. Do your research first about which banks can offer line of credit. Once you have the list, you can inquire about the specific requirements and submit them to the bank.

How to obtain business line of credit without collateral or proof of revenue?

There are many banks or lenders that offer unsecured business line of credit (or those without collateral), especially if you have good credit score. But in most instances, proof of revenue is one of the most basic documents required to be submitted upon application.

How to qualify for business US bank line of credit?

A business line of credit from US Bank is available for businesses with at least two years of operating history. To qualify, you need large, fluctuating cash flows because the credit limit can reach up to $500,000, depending on your qualifications.

How to get a business line of bank credit?

Each bank will have varying set of qualification requirements to obtain business line of credit. Make sure to approach your bank about what those requirements are and provide the required documents accordingly.

Where is the best place to get a business line of credit?

A standard bank is the best option if you want to obtain a business line of credit. However, you must good credit standing to apply.

How hard is it to get Wells Fargo new business line of credit?

If you want to obtain a business line of credit from Wells Fargo, you have to options: secured and unsecured. An unsecured line of credit will give you access for up to $100,000 but this is subject to final credit approval. You must be an owner of the business you are applying for. For a secured line of credit, you must own a Wells Fargo savings account.

Why business need line of credit?

There are several reasons why a business line of credit is necessary: to improve working capital and cash flow, or to make a big purchase for your business.

What is taken into consideration for a business line of credit?

Your business years in operation and the credit score of the business owner are taken into account. In some cases, both the personal credit and business credit are evaluated.

What do banks ask for when applying for a business line of credit?

Most banks require personal credit report, collateral (for secured lines of credit), and a personal guarantee. The requirements will vary from one bank to another, so some might require more or less from the list above.

How can I apply for Paypal business line of credit?

Go to Paypal’s website and check the eligibility requirements. Fill out a form and you can get a calculated estimate of your line of credit. Submit your application form and you will determine how much funds you can get with your business line of credit (once approved).

Business Line of Credit Specifics

This section delves into the specific details of a business line of credit, such as the amount that you can access to and what you need to improve your credit access.

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How much business line of credit can I get?

The amount of credit limit that you have access to as a business will largely vary according to your credit score. Most business line of credit will give you up to $100,000.

How to determine business line of credit amount?

Lenders and providers of business line of credit have unique formulations that they use to determine the credit limit provided for each business. They use a number of factors including the applicant’s credit score and annual sales revenue.

What is the interest rate on a business line of credit?

The interest rate on business line of credit varies from one lender to another, as well as the credit standing of the borrower. But you can expect it to be similar to personal loans – 3% to 5%.

How to increase business line of credit?

You can increase your limit on business line of credit by proving that you are a strong borrower with good payment record. It is also good to build up both your business and personal credit score. And of course, an increase in profits for your business can help.

Business credit cards or line of credit which is better for business?

There are certain pros and cons for each option. Many businesses opt for business credit cards because of the rewards programs and cash back offers. Meanwhile, a line of credit won’t give you those perks. Both are revolving types of credit for businesses.

How to establish a business line of credit at a credit union?

Credit unions are one of the best places to start, especially for small businesses that are looking to build their credit. It is often easier to qualify for a line of credit compared to traditional banks.

What is business overdraft line of credit report?

An overdraft line of credit is a type of loan that is associated with your checking account. If your account lacks funding, you can tap into your business line of credit so your checks won’t bounce.

How to establish a business line of credit for purchasing cars?

A business line of credit is a good option for businesses to build credit history, especially if you want to build a commercial fleet.

When is it wise to close a business line of credit?

There will be closing costs involved with a business line of credit, so make sure to verify that with your provider. A business line of credit can help you with building your credit. It is best to evaluate closely if you no longer need access to funds before closing it.

What is a typical business line of credit rate 2019?

In 2018, the average interest rate on business lines of credit was at 5.75% but can go as low as 4.75% if you have collateral.

How to manage a business line of credit in Quickbooks?

Quickbooks is a great tool you can use to manage your cash flow using a business line of credit. Whenever you tap into your line of credit, make sure to record it in Quickbooks and any payments made towards your line of credit. This will enable you to monitor any time you draw funds from your account and when payments are made, so you know exactly how much is still available.

What is business line of credit maturity date?

The maturity date on your business line of credit refers to the date when the principal amount and the interest rates on your business line of credit are due in full. It is typical with business lines of credit wherein you must start with interest-only payments.

How much do I have to pledge for Wells Fargo secured business line of credit?

If you want to secure your Wells Fargo business line of credit, you must have a Wells Fargo savings account or CD account.

What are the limitations of a business line of credit?

Some of the limitations for using a business line of credit are, obviously, the amount limit placed on your account. This will determine the total amount that you can gain access to. This amount will vary according to your revenue report and your credit score.

What is collateral in business line of credit?

There are various options available when it comes to collateral for securing a business line of credit, which includes real estate, equipment, and other forms of business assets.

What banks give out unsecured business line of credit?

There are numerous banks that offer unsecured line of credit such as Bank of America, Wells Fargo, and United Bank, to name a few.

What is a business checking line of credit?

A business checking line of credit can be tied to your business’ checking account. This will provide your account with access to funds to ensure that your checks won’t bounce, in the event that you have used up the amount on your checking account.

What happens if you do not pay business line of credit?

There are serious consequences if you default on your business line of credit. It could hurt your business’ credit score and derail your chances of securing small business loans in the future.

What is the average interest rate on a business line of credit?

The standard rate for a business line of credit would be anywhere from 5-6%. But if you secure your line of credit with collateral, you can reduce it to 4%.

What amortization period is used for setting a business line of credit payment?

A monthly amortization is required on your business line of credit, which will be calculated on any purchases made and its corresponding interest.

What percentage of small business has a line of credit?

A huge percentage of small businesses opt for a line of credit to support business funding. This is more suitable for this type of business as many large banks will require substantial cash flow and revenue report before providing a business line of credit to applicants.


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Jason Smith


Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state. 

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