BUSINESS Line of credit

Establish Business Credit

A business credit line can be used to finance short-term expenses such as payroll and inventory. Online and traditional lenders both offer business credit lines.

The business line of credit is similar to a credit card, where you can borrow up to a limit and only pay interest. The funds are then repaid and you can draw more.

A business line of credit offers more flexibility than traditional small-business loans, which you get a lump sum and then repay it over time with interest. A business line of credit can be used to cover a wide range of short-term financial needs such as managing cash flow, purchasing inventory, or paying payroll.

BuSiness line of Credit

How Does a Business Line of Credit Work?

A business credit line works in the same way as a credit card. A line of credit allows you to access a fixed amount of capital, such as $150,000, and can draw money as required. Only the funds you draw are subject to interest.

The funds are then repaid over time, usually on a weekly- or monthly basis. To save interest costs, many lenders will allow you to pay off your entire balance before it is due. Additional fees may be charged by some lenders, including:

• Origination fee: A fee charged to process your request.
• Account maintenance fee: A monthly or annual fee for managing your account and maintaining your business credit line.
• Draw fee: Charge for each draw to your credit card line.
• Inactivity fee: If you do not draw from your credit line within a certain time frame, a lender may charge this fee.

As long as your credit limit is not exceeded, you can draw on your credit card line as many times as you like. Revolving credit lines for small businesses are more flexible than term loans which require you repay a lump sum over a set term.

BUSINESS line of Credit

Where and How to Get a Business Line of Credit

Credit unions and banks

Credit unions and banks can offer different types business credit lines including secured and unsecure business lines of credit as well as SBA credit.

These lenders may offer business credit lines with attractive interest rates. However, they will typically require that you meet certain requirements. It is likely that you will need strong credit and revenue, as well as several years of experience in the business.

Banks and credit unions are more likely than online lenders to require collateral to secure your credit line, especially for larger amounts. They also tend to charge higher fees, such as inactivity and annual fees.

Online lenders

Online lenders like Bluevine or Fundbox have more flexibility than banks and credit unions in terms of qualification requirements. Online lenders can work with businesses and startups with poor credit.

Online lenders often have simplified application processes and lower fees. They may even be able issue small-business lines credit within days. These lenders may charge higher interest rates than banks, and have lower credit limits.

How to get a line of credit for your business

A business line of credit can be applied for through a bank or credit union. You can also apply online to compare offers from different lenders.

Lenders can change the interest rates, borrowing limits, and qualifications.

Lenders will usually consider your personal credit score and annual revenue. They may also ask for financial documentation such as:

• Tax returns for individuals and businesses.
• Statements from personal and business banks.
• Financial statements for business (e.g. profit and loss statement, balance sheet).

Additionally, you may be asked to sign a personal guarantee or provide collateral.

BUSINESS line of Credit

Comparing Different Business Lines of Credit Options

Secured vs. unsecure business credit

Secured business credit lines require you to pledge assets like inventory and property as collateral. Lenders can seize your assets if you don’t pay the credit line.

Unsecured business credit lines don’t require collateral. However, some lenders might still require a personal guarantee, or a lien on the assets of a business.

Lenders can use a personal guarantee to seize your personal assets such as your home if you default on a loan. Similar to a lien, a lender can seize business assets if your loan hasn’t been repaid.

Ask lenders whether collateral is required, such as a personal guarantee, or a lien, so you can choose the best option for your company.

Business credit cards vs. business lines of credit

Business credit cards can be considered lines of credit but are different from traditional lines of credit in many ways.

A business credit line can offer a higher credit limit and may be secured with collateral. It also provides cash in your account when you draw. Although you can obtain cash using a business credit card (often called a cash advance fee), there will be higher fees and an APR.

However, business credit cards can offer cash back or rewards for spending, which isn’t offered by traditional credit lines. Rewards can be related to business expenses such as office supplies and internet. You may also be eligible for 0% Interest Promotions, that allow you to have no interest for a certain time after signing up for your card.

For smaller ongoing expenses, and newer businesses with less established finances, business credit cards are best. Business lines of credit are best for more mature companies and larger ongoing expenses.