Business Line of Credit: How It Works
Author: Joe Camberato:
Last Updated on May 13, 2021
As a small business owner, you have many different options when it comes to financing. If you’re looking for a flexible solution that’ll help you manage cash flow disruptions, unanticipated expenses, or pursue new growth opportunities, you’ll want to consider a business line of credit. A business line of credit is a type of revolving loan that gives you access to a fixed amount of capital – aka your credit limit. It works similarly to a credit card but comes with lower interest rates and larger funding amounts.
How does a business line of credit work?
A business line of credit provides you with a reservoir of funds you can draw from as you need. You’ll be able to borrow money up until your credit limit, and only pay interest on what you’ve borrowed. As you repay, you’ll be able to draw on those funds again, up until your credit limit.
A business line of credit is distinctively different from a small business loan, which provides you with a lump sum of capital you’ll need to repay over a fixed amount of time.
Business lines of credit don’t come with fixed-payment terms. Your payments will depend on how much of your credit limit you’ve borrowed and your lender’s preferred payment schedule – which is typically weekly or monthly.
Business line of credit borrowing limits typically cap at $250,000 – which is smaller than business loan limits.
A business line of credit is one of the most flexible forms of financing around. Business owners have considerable autonomy over how they can spend their funds.
Many business owners will use a line of credit as an emergency fund, to purchase new inventory, hire new staff, invest in marketing campaigns, or cover other ongoing expenses as well as lump-sum purchases.
How do I qualify for a business line of credit?
Business line of credit requirements will vary according to different lenders. Most traditional lenders, like banks, emphasize revenue, business history, and credit score.
You’ll most likely be asked to provide numerous business financials, including personal and business tax returns, bank statements, profit-and-loss statements, balance sheets, and other financial statements.
Other types of lenders, especially online banks or fintech companies, tend to be more lenient. They tend to value revenue and your business’s potential for growth, over credit scores and history.
For example, National is an online marketplace featuring a diverse platform of lenders. At a minimum, you’ll need to have at least 3 months of business history and $120K in annual revenue to qualify. Plus, there are financing options for a wide range of credit scores.
If you’re looking to secure a larger borrowing limit or qualify for better interest rates, it may be helpful to put up collateral in exchange for financing.
Secured vs. unsecured business line of credit: What’s the difference?
A secured business line of credit is where you put up collateral, such as inventory, property, or accounts receivables, in exchange for financing.
An unsecured business line of credit doesn’t require any collateral or assets. Instead, lenders will look at your business financials and other factors.
Some lenders, such as banks, may require collateral if you’re seeking a large amount of financing, or if you’re lacking in qualifications.
Lenders view secured business lines of credit as less risky than unsecured lines of credit. The reason behind this is simple – if you fail to pay back your secured line of credit, lenders can seize your assets.
If you agree to collateral or a lien, your assets are at potential risk. This becomes especially dangerous if you’ve agreed to a personal guarantee, which would allow lenders to go after your personal property, such as your home, if you can’t make payments.
Not all lenders will require collateral in exchange for a business line of credit. Make sure to ask different lenders about their requirements to make the best decision.
Business credit cards vs. business credit lines
Business lines of credit are similar to business credit cards. They both offer access to a set amount of funds you can draw from as you need. Nevertheless, there are major differences between these two forms of financing.
For starters, business lines of credit feature higher credit limits than credit cards. They also make it a lot easier to access cash. Although you can withdraw cash from your business credit card, you’ll most likely be charged additional fees or a higher APR.
Aside from a 0% introductory period, business lines of credit usually feature lower interest rates than credit cards. Business lines of credit also typically come with fixed interest rates while credit card interest rates are variable, and can change according to market conditions.
However, business credit cards come with favorable rewards or cashback programs. For these reasons, you’ll want to use your business credit card to manage everyday, smaller expenses, such as office supplies, meals, travel expenses, or any other category that offers rewards.
On the other hand, a business line of credit is best suited for larger, ongoing expenses or as an emergency fund.
How can I get a business line of credit?
Several different types of lenders offer business lines of credit. The most common lenders include banks, credit unions, and online lenders.
Banks and credit unions typically have the most rigid lending requirements. You’ll need to have sound business financials, good credit, strong revenue, and have been in business for at least a couple of years to qualify.
On top of strict requirements, the application process at banks and credit unions can be lengthy, time-consuming, and rigorous. Younger businesses may especially have a hard time getting approved.
It can be much easier and faster to obtain financing from an online lender – especially for younger companies or those with less than perfect credit.
At National Business Capital, we maintain a platform with over 75 different fintech lenders. We have financing options for all different kinds of businesses. And we’ll work with you to help you find the best, customized solution based on your qualifications.
Ready to get started? Fill out our 1-minute application and a Business Financing Advisor will contact you shortly!
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!
About the Author, Joe Camberato
Joseph Camberato, CEO at National Business Capital & Services, developed a passion for business at a young age. Joseph has a true respect for anyone who owns a business and enjoys engaging them in discussions of how they “made it happen.”
Suggested Reading:
Small Business Trends You Should Follow in 2021
