In these times of emergency, a Business Line of Credit comes to the rescue of small businesses. It is a good option for financing your small business and can be pretty helpful when you fall short of funds in an emergency. However, if you are unsure about what a Business Line of Credit is and how to apply for one, there is no need to worry. We will be covering what exactly is a business line of credit and how you can use it.
What Is A Business Line Of Credit?
A Business Line of Credit is an amount you can borrow at the time of your need and then pay it back later. Its working is similar to a credit where the user only pays for the amount he uses, and it is a revolving credit. There is a limit to the amount you can borrow, and the interest is only on the amount you are borrowing.
It is different from traditional business loans because the funds acquired by a line of credit can be used by the business whenever there is a requirement. They can use it to purchase their inventory, supplies, or expenses on functioning. There is also no fixed monthly repayment, unlike a term loan.
Types Of Business Line Of Credit
There are two major types of business lines of credit, and there are a few differences between them. These are:
Secured Business Line Of Credit
In a secured business line of credit, the borrower has to pledge its assets, which are used as collateral against the loan. However, this type of loan is only a temporary liability; therefore, the lender will not ask for significant assets. Accounts receivables or financial assets of the business can usually work as collateral. In case the business fails to pay back the line of credit within the specified period, the lender will liquidate the collateral to recover the due payment. The usual lower limit of this type of line of credit is $100,000
Unsecured Business Line Of Credit
The other type of business LOC (line of credit) is Unsecured, which has a little higher preference. It’s because there is no requirement for collateral. However, this type of line of credit is riskier. That is why the lender issues an amount lower than a secured business line of credit. The amount ranging from $10,000 – $100,000 with a variable interest falls under this category.
The borrower also has to provide a personal guarantee to the lender. It can be risky in case of failure in paying back, as the credit rating will be affected for the business.
Also read:- How To Apply For An SBA Loan And How Long Does It Take?
Why Should A Small Business Go For A Business Line Of Credit?
Any small business has to be on its toes, no matter how good the situation might be. It is because even small changes in the market can affect business operations. That is why a Business Line of Credit is an excellent option to choose.
There are many benefits that a Business Line of Credit can have. However, we would advise you to be cautious as it is still a liability at the end of the day, and stacking up debt can be risky. Now, Let’s have a look at its benefits:
Flexibility
This is a very crucial benefit that comes with a business line of credit. After a line of credit receives the approval, the business can draw funds anytime it may need them and for whatever purchase they want to make to grow its business.
Revolving Credit
We mentioned already that the business line of credit is revolving. It means that the interest is only paid on the borrower’s funds. You don’t have to pay for the funds that remain unused. It is an advantage over term loans, where the interest is paid on a lump sum amount. Before committing, it is advisable to be wary of all fees, such as the draw and payment processing fees. Some fees vary with the lender, and you should understand and clear your queries related to the fees they charge.
Improvement In Business Credit Rating
When a borrower pays back on time and maintains a good relationship with the lender, it improves the business’s credibility. It can help a company improve its credit rating as well. The lender can also report good credit-related behavior to credit rating agencies. In turn, your credit rating will improve, and you will become eligible for bigger credits.
Lower Interest Rate
Business Lines of Credit generally have a lower interest rate than Business Credit Cards. Usually, the conditions set by the lender are also quite flexible, with no fixed payment. It can be a convenient way for a business to grow without thinking too much about high interest or the time of repayment.
The Process Of Applying For A Business Line Of Credit
While receiving a business line of credit is not very hard, the pre-requisite can complicate it. Thus, it would be best to keep certain things in mind before applying for a business line of credit. These are the requirements:
- A business line of credit requires collateral if the borrower asks for a considerable amount. It is done to provide security to the lender and reduce the risk.
- The lenders usually provide a line of credit to businesses at least two years old. It is rarely the case when a new business gets the chance of a business line of credit.
- Proof of revenue and the health of the business is also a requirement from the lenders. Not just anyone can get a business line of credit. There is no reason for the lenders to give it to a company that could not generate profits, and they ask for collateral in those cases as a guarantee.
Once a business is eligible for a business line of credit, all it takes to apply is to follow some simple steps which can be done online. You just have to provide your business information and connect the business bank account. The turnaround time can vary depending on the lender. You can do it in as little as five minutes, and it can reach up to several days. Once the loan gets approved, you will get a loan agreement. You will be ready to use the funds after signing the agreement.
*It is advised to read the agreement properly before signing it to avoid any complications in the process.*
Where To Go For A Business Line Of Credit?
There were times when only some big banks could provide a business line of credit. However, these are changing times, and now plenty of options are available. It has added flexibility to the process and made it faster and easier to get.
You can also get it from Alnicor Consulting, as we offer a wide range of financing solutions that fit your needs and the requirements of your business. We provide all sorts of lines of credit depending on your short-term need or long-term growth plan. You can get it all at feasible prices and in the shortest amount of time possible. You can contact us by sending a mail to info@alnicorconsulting.com or dialing 183-325-6267 for any further queries.
Frequently Asked Questions
They may be similar, but they are not the same. A Business line of credit usually offers a higher credit limit to the business. However, business credit cards can offer rewards which is not the case with lines of credit.
A Business line of credit has plenty of benefits associated with it. Any small business can reap these benefits to boost its growth in the long run or to compensate for the lack of funds in the short run.
A Business line of credit is safe, mostly. But, one risk that a business should look out for is that they should make full use of the funds. A line of credit is revolving and has flexible payments, but it is still a loan. Failing to repay the loan can result in a loss of the company’s assets or a bad reputation in the market, making it hard to get a loan the next time.
It is possible to get a traditional business loan without revenue on the premise of a personal guarantee and a history of income proof. However, a line of credit can be difficult to get without any revenue. Good credit history or history of revenue generation can impact the approval, but a company without revenue is highly unlikely to get approved for a line of credit. So, if you are a new business with no revenue, you can choose other loan options.