A line of credit for small business can be highly beneficial in many ways. For instance, it lets businesses readily access capital whenever they require it.
Not only that, but it can be an excellent tool for businesses in other instances. If a client is sluggish to pay or revenue is down, companies can get funds. All thanks to the line of credit for business. Let us learn more about the line of credit for business, its benefits, and how to apply it.
An Overview of Business Line of Credit
A line of credit for business is nothing but a flexible business loan. It is a lot like a business credit card. The borrowers receive a specific amount on their loan approval. They may capitalize on their line of credit whenever needed and pay interest only on the loan amount actively borrowed. Generally, the borrowers can access the funds via a business checking account or mobile application.
A business line of credit is renewable, which makes it different from a traditional or term business loan. When the borrower repays the loan, the credit amount available is refreshed. This is as much as payments against a credit card limit. Business lines of credit are generally accepted for months or even years. However, the timeframe may vary from lender to lender.
Secured vs. Unsecured Line of Credit
A business line of credit can be secured or unsecured. You may want to understand how each works. Let us walk you through the differences between the two:
Secured Line of Credit
Once a loan is secured, the lender creates a lien on an asset belonging to the borrower. This is now collateral, and the lender may seize or liquidate it if there is a default. A car loan or a home mortgage are two common examples. The bank provides loans in exchange for collateral like a home or a car.
Just like that, a business or individual can get a secured line of credit by placing assets as collateral. If the borrower fails to repay the loan, the bank may seize and sell the collateral to recover the loss. The bank is confident that it will get its money back. So, a secured line of credit often has a bigger credit limit and a lower interest rate than an unsecured business line of credit.
Unsecured Line of Credit
From a lender’s perspective, providing an unsecured line of credit is a greater risk. If the borrower fails to repay, none of their assets will be seized. Not to mention, unsecured lines of credit are more difficult to obtain for both enterprises and individuals.
The best example of an unsecured line of credit is credit cards. That is why credit cards come with higher interest rates. If the cardholder fails to repay, the card issuer’s sole option is to seek restitution.
What are The Pros of Using a Business Line of Credit?
A line of credit for small businesses can give invaluable benefits to a business owner. Some of the best ones are as follows:
Usage Flexibility
A closed-end loan is a loan the borrower must pay off at the end of a specified period. It is often used to fund a particular purpose, such as a piece of equipment. With a business line of credit, you can enjoy more flexibility and use it for various purposes. This lets you decide what to invest in for the business.
Let you Access Cash on Demand
A business line of credit lets you source funding before your business actually has a demand for it. Business usually has a cyclic nature. Therefore, you might want to borrow funds to look after the short-term necessities of your business. When you have access to funds on the credit line whenever you want, you can keep your business running seamlessly.
Repayment Flexibility
In traditional term loans, the borrower has to make a fixed monthly payment. This may be an obstacle to a start-up’s growth. However, with a business line of credit, the business can ensure flexibility in repayment.
Builds Business Credit
Businesses need to earn ratings with the major business credit reporting agencies. When you have a business line of credit, you can create a positive payment history, which will show up on your company’s business credit report.
Thus, you can potentially receive future credit for the business owing to your company’s trustworthiness.
When to Use a Line of Credit for Business?
A line of credit for business is helpful for numerous reasons. The following are a few payments where you will need it:
- Buying new inventory
- Opening a new branch in a different area
- Making timely bill payments
A business line of credit can be more helpful for small and medium-sized businesses. It can help them grow and expand.
Fees for Business Line of Credit
When applying for a line of credit, potential lenders charge certain fees and interest. This is for both opening and using the funding. This is indicated by the line’s annual percentage rate (APR), which includes some standard fees:
Draw Fee
Many lenders impose this fee whenever you utilize your business line of credit. The fee can range from 1% to 4% of the withdrawn amount.
Payment Processing Fee
Some lenders impose a fee for online payment of the bill.
Origination Fee
Certain lines of credit require a fee to open the credit line through the lender. This is called the origination fee, which can be around 1% to 3% of the loan’s principal amount.
Late Fee
If you fail to pay on time, you may have to pay a late fee.
Wire Transfer Fees
Wire transfer fees are generally about $15. Lenders charge this fee whenever you wire money to your personal account.
Also Read: What is Organic Growth in Business?
How to Apply for a Line of Credit for Business?
Firstly, you must determine the amount of funds you need. It is also essential to analyze well and apply for the right loan. Here are the other crucial steps on how to apply for a line of credit:
Know Whether you Need a Secured or Unsecured Line of Credit
A business can benefit from secured and unsecured lines of credit. A secured line of credit can be helpful for businesses with valuable assets or less-than-ideal credit.
Compared to an unsecured line of credit, you can ensure a lower interest rate with collateral. Not just that, you can get a loan approval even with bad credit.
Check Whether you are Eligible or Not
There are many factors that determine whether you are eligible for a business line of credit or not. A few of them are as follows:
Credit History
The credit history is the indication of the chance of your defaulting. A majority of lenders ask for a credit score of about 680. But, some accept scores below 580.
The higher your score, the more likely you will get a lower interest rate or a higher loan amount.
Time In Business
A business should be in existence for a minimum of 1 to 2 years. This is a requirement for most banks nowadays. But, there are many online lenders who have a requirement of just six months. The longer the company operates, the more trustworthy it appears to the potential lenders. Thus, the business can secure a lower interest rate on the loan.
Business Revenue
A majority of lenders have a minimum yearly or per month business revenue requirement. But, this may differ based on the particular lender. It may be anywhere around $10000 per month to 250,000 annually. Online lenders generally have less strict revenue requirements compared to traditional banks.
Research and Compare
After knowing your needs and eligibility, you need to now research lenders. During your search, compare the maximum credit limits of various lenders. Furthermore, compare their minimum requirements, APR ranges, and repayment terms.
You can apply via various types of institutions, such as:
- Banks and credit unions
The best examples of traditional lenders are banks and credit unions. These are perfect for businesses with good credit scores and long business histories. The businesses that are new might not be eligible for loans from these institutions.
- Online lenders
Online lenders can be the righteous option for businesses with lower credit scores, shorter business histories, and minimal revenue. These lenders generally approve riskier loan applicants. Thus, interest rates can be higher compared to banks and credit unions.
Collect Necessary Documents
As soon as you find the preferred lender, you may now have to collect the required documents. The purpose of this is to get ready for the formal application procedure. These documents can be:
- Business licenses
- Profit and loss statements
- Personal and business tax returns
- Business plan
- Financial statements
- Personal and business bank statements
Submit The Application
The final step is the submission of your application. You can do it either through the Internet or in person. The turnaround times for this can differ from lender to lender. Also, it may take no more than 5 minutes or several days to reach a conclusion.
You may also need to give extra documents to the lender as they review your application. Here are some of the essential details your lender might ask for:
- Your name
- Business name
- Loan purpose
- Loan amount
- Social security number
- Annual revenue
After the loan approval, your lender will give you an agreement to sign before they issue your business line of credit.
Conclusion
A line of credit is a helpful financing tool. It can offer a bunch of benefits to a business, from flexibility to access to capital on demand. But, there are certain steps that it takes to apply for the same. Ensure that you meet its eligibility criteria and provide all the necessary documents.
Alnicor Consulting is a reliable destination to secure a line of credit for small business. We have an enormous range of financing solutions that meet your business needs. We assure you the best possible price for the same.