If you are running a small business, you may need a certain backup to aid you financially during the most challenging phases. A business line of credit (LOC) is a reliable option for financial support.
A line of credit provides a prearranged sum of funds for borrowing and repayment that offers adaptability for financial needs. It is a flexible funding option for cash flow management and backing short-term business needs. Most modern-day businesses are using these funds for various purposes. It is generally used for purchasing inventory or covering operating expenditures. Due to its flexibility and reusability, a line of credit has become an indispensable financial device for negotiating the complex nature of contemporary business.
According to a survey, business lines of credit are the most popular form of funding, with nearly 43% of businesses applying for one. You may wonder how to get a business line of credit. Keep reading to find out.
Different Types of Business Lines of Credit
Generally, you may come across two types of business lines of credit, which are secured business lines of credit and unsecured business lines of credit. Let’s learn about each of them in detail:
Secured LOC
A secure LOC requires the business to pledge collateral to get approval for the credit. The collateral can be anything, for example, inventory, real estate, or any other valuable asset. Qualifying for a secure LOC is easier as the collateral guarantees repayment to the lender. If the business fails to repay, the lender has all the right to repossess the collateral.
Unsecured LOC
In the case of an unsecured LOC, there is no need to provide collateral. This results in a higher rate of interest. The approval of an unsecured line of credit depends on the business and its credit history. But, certain lenders may still need a personal guarantee from the business owners.
Read Also :-What is Line of Credit for Business? How to Apply?
Why Do Businesses Choose a Business Line of Credit?
Regardless of how good the situation is, businesses should remain adaptable and prepared to address unexpected changes in operations or finances. Any changes, even the smallest ones, can impact the business operations. Here, an LOC plays a crucial role. It can be a great option for managing cash flow and supporting business growth.
The best part about lines of credit is that they often come with lower interest rates. Also, they have more lenient repayment terms than other types of loans. Here are some of the top reasons businesses choose an LOC:
- At times of rapid growth and seasonal slowdowns, businesses want to cover cash flow gaps. An LOC can be an excellent option in such situations.
- Purchasing necessary equipment or materials with a line of credit becomes much more hassle-free.
- In case of a delay in associated accounts receivable, a LOC can be a great source for covering accounts payable.
- Line of credit can also allow companies to grab special deals offered to businesses with available credit.
How a Business Line of Credit Works?
In an LOC, the borrower gets a smaller amount compared to traditional business loans. But, there is a comparatively quicker procedure when applying for a line of credit. Online loan providers can offer cash in one or two business days, whereas banks may take longer to credit the amount.
An LOC works like a credit card that allows businesses to borrow up to a set limit and pay interest only on the amount used. As you make repayments, the amount of credit available is refreshed, similar to payments toward a credit card limit. This means that following repayments, you can carry on to withdraw more cash up to the credit limit.
Repayment terms for business lines of credit can differ depending on the lender. The period can range from some weeks to several years. Thus, businesses can choose a term that best suits their financial situation and needs.
Interest Rates for a Business Line of Credit
There may be an increased risk with a line of credit for business. So, the loan’s interest rates are higher than conventional business loans. A lot of factors may impact the business line of credit rates, which include:
Credit History
If a business has maintained a good credit history, it can expect to get better interest rates. Businesses with bad credit histories may have to pay higher interest rates.
Duration
Newer businesses are usually regarded as riskier, so they may not get good interest rates. Established companies or businesses that have existed for a long time can get better borrowing rates.
Annual Revenue
If a business generates a higher yearly revenue, it signifies that it can repay the loans on time. This can help that business in getting good interest rates.
Essential Documents for a Business Line of Credit
When applying for a business line of credit loans, you must submit various documents. These may include:
- Business registration documents
- Personal identification such as passport, driver’s license
- Bank statements
- Tax returns
- Financial statements
- Additional documents like annual revenue report
Additional Requirements for a Business Line of Credit
To determine the risk of lending to a company, the loan providers would need to consider certain factors before providing a line of credit. These requirements may include the following:
Collateral
Collateral is an essential requirement for businesses considering line of credit. This is especially important for secured lines of credit, where businesses pledge assets such as real estate or inventories. Compared to unsecured loans, the collateral lessens the lender’s risk, resulting in lower interest rates and more significant credit limits.
Financial Statements and Reports
Financial statements and reports are other key requirements for an LOC. These are the documents that show a company’s financial condition. The lenders may ask for documents like income statements, business plans, balance sheets, and more for assessing the company’s performance and figuring out its ability to repay. So, you must compile tax returns and business data to attain a line of credit.
Profit and Revenue
Another important factor that can decide whether you will achieve a line of credit or not is the profit and revenue. This determines a business’s capacity to generate income. When you have a record of generating a hefty revenue, the lenders will be more interested in providing you with credit.
Guarantee
For a loan provider, a guarantee is an assurance of the security of the credit. Personal guarantees are important when lending to startups that are yet to build a credit history or lack appropriate collateral. The guarantee provides lenders with assurances beyond the business’s assets, making them feel more confident that the loan will be repaid.
Economic Ratios
Lenders evaluate financial metrics like debt-to-equity ratios to assess a company’s ability to manage debt and its overall financial stability.
Steps to Apply for a Business Line of Credit
First, decide how much funding you need to save as a backup. Lines of credit range from about $1,000 to $1 million or more, so keep that in mind and research before applying for the loan. Follow all these steps about how to get a business line of credit:
Check Your Credit Score
A good credit score can raise the odds of securing a line of credit with a low interest rate. If you have a higher credit score, there can be an increased chance of approval.
Collect Essential Documentations
After checking your credit score, you must gather the documents you need for the application. Get everything from business licenses to tax returns and bank statements.
Compare Different Lenders
You must compare the offerings of various lenders. Look around and choose a lender that aligns with your business needs. Consider various factors like credit limits, interest rates, and fees while evaluating the lenders.
Complete Your Application
You must understand the terms and how the line of credit works. Calculate all the costs and fees involved and learn how soon you can get the funds. Consider whether you want secured or unsecured financing.
Submit Your Application
Fill out your application form for the line of credit. Double-check that all the information you have provided is correct. Ensure that the application is complete. Once you submit, the lender will check the application and ask for additional documents.
Your loan application will undergo processing. After the application is processed, the lender will inform you of the decision. Once approved, you can begin to use your credit as needed, paying interest only on the borrowed amount.
Takeaway
A business line of credit ensures businesses a reusable form of credit that they can access when needed. The eligibility criteria for such a type of loan are quite lenient compared to traditional business loans. This makes them the best option when it comes to financial backing.
For businesses seeking growth in the industry, a line of credit for business can provide significant financial backing. The eligibility criteria for such funding can be easier if you know the requirements and have the essential paperwork. Rely on the right lender if you are considering a line of credit.
If you are seeking financial backing like a line of credit but are new to it, get expert guidance from Alnicor Consulting. Alnicor is a trustworthy place to get an LOC. We are a reputable name for offering financing solutions to businesses from various industries. Connect with Alnicor Consulting now to book your appointment.