All About Business Line of Credit
Even if your business doesn’t need a large injection of cash all at once, you might find some things are financially out of reach, from time to time. If so, a business line of credit may be a great solution for you. With a form of convenient, flexible, ‘revolving’ capital, you can borrow the money you need, when you need it.
What is a Business Line of Credit?
When you have a business line of credit, you can borrow a certain amount of capital annually, just as with personal credit. You make payments only on the credit you've actually used. This can help you manage cash flow shortages or cover surprise costs until you have the funds. You won’t have a regular monthly payment schedule as you would with a long term or short term loan but there usually are minimum monthly payments required.
A business credit line can be secured or unsecured and it can be easier to get compared to other types of business loans. It should not, however, be used for long-term investments or major purchases. Businesses should be able to repay promptly as the interest and late fees can compound quickly with a line of credit.
How much can I borrow?
Rates, terms and limits for business credit lines vary. The interest rates on lines of credit are generally lower than those of credit cards, with higher limits. They are based on the bank or financial institution’s prime rate, plus a premium. Interest is charged as soon as money is borrowed, so a business can set up a line of credit as a safeguard, with incurring interest. There may, however, be a setup fee and an annual fee to keep the credit available.
The amount you can borrow is typically based on accounts receivable and current inventory but usually less than $500,000. A secured business line of credit typically comes with a higher credit limit and lower rates.
How does a business line of credit work?
Apply - You can get a line of credit through your bank and most national and regional banks as well as many larger credit unions offer business credit lines.
Get approved - Getting a credit line depends on your business’ creditworthiness and your personal credit history and score.
Tap into your funds - Draw down or withdraw funds on your line of credit any time to help your business grow.
Business line of credit vs Business credit card
A business line of credit may sound the same as a business credit card. There are, however, a number of differences between the two:
|Business line of credit||Business credit card|
|Can be secured or unsecured (collateral required for secured line of credit)||An unsecured loan based on your personal credit history|
|Tap into the line of credit by making a direct deposit to your checking account, or by using a debit card linked to the account||As it works almost exactly like a personal credit card does, use the card to pay for business-related purchases|
|Minimum monthly payment (based on interest charged and average daily balance)||Minimum balance to be paid each month and interest charged for late payments|
|No cash advance fees||Expensive cash advances|
|You can pay off your balance and borrow again as often as you’d like||You can avoid interest charges by paying your statement balances in full|
|Helps to build a credit history for your business||Based on your personal credit history|
|Does not include rewards or benefits||You can receive rewards for your business spending such as airline points|
|May have opening, renewal or maintenance fees||There is usually a joining fee or renewal fee|
6 reasons why businesses may open a line of credit
There are a number of reasons why a business might apply for a line of credit, whether to take advantage of strategic investment opportunities, meet working capital needs or even as a safeguard.
Here are a few common reasons why businesses might need a credit line:
- You’re a seasonal business steering through the quiet months or preparing for the busy season
- You’re a high-volume, small dollar sales business and want to better manage cash flow
- You’re looking to innovate or invest in new technology or equipment, purchase inventory, materials or supplies
- Your credit score is not high enough for a traditional bank loan
- For payments to suppliers who won’t accept credit cards or who charge additional fees for credit card use
- You have an earnings history but not enough to qualify for a traditional loan
- You are looking for opportunities to build your business credit.
4 expert tips to know about business line of credit
- Remember that credit is a form of debt Businesses must be realistic about their ability to repay what they borrow.
- Ask about other charges and late fees These can add up quickly if you’re not careful!
- Consider your risk level Applications are assessed on case-by-case basis but your chances improve if you demonstrate experience and are operating in a lower-risk industry.
- Put your best foot forward Make sure you have the necessary documents available before applying, including bank statements, profit/loss statements, your credit score and tax returns.
Still not sure if a business line of credit is right for you? Compare to a small business loan to learn more.