Business line of credit
All businesses start with a great idea, and with the right source of funding, like a business line of credit, you can find the perfect financial safety net to keep your company moving forward.
A business line of credit is an all-purpose source of credit that can be used to pay business-related expenses. Unlike a business loan where payments are due on a regular basis in order to decrease the amount borrowed, a business line of credit for new businesses can be repeatedly used, much like a personal credit card. With high limits and moderate interest rates, business lines of credit are a great way to pay for business essentials.
Before heading to the bank to borrow money, here’s what you need to know about taking out a commercial line of credit:
$5,000 – $2,000,000
6 Month, 1 yr, or 2 yrs
As little as one business day*
As fast as 1 day
What Is a Business Line of Credit?
A business line of credit is unsecured, meaning there's nothing tangible backing the loan, so funds can be used as needed to purchase supplies and inventory, pay bills, obtain low-cost equipment, or pay for any other business needs.
While there are no hard and fast rules for getting a business line of credit, the majority of lenders will want to see at least six months of business history and an annual revenue of at least $50,000.
Most loans, especially business loans, are secured loans. This means that the value of an asset, like a house, car, or piece of equipment, is securing the loan. If a secured loan can't be paid back, the lender may take the assets being used as security. Because business lines of credit are generally unsecured loans, a bank doesn't have any way to make businesses repay these loans. This is why it's important for companies to demonstrate they make enough money to pay back an unsecured business line of credit in order to qualify for a loan.
How Does a Business Line of Credit Work?
Unlike a small business loan, which is borrowed in one lump sum and paid back according to a repayment schedule, a line of credit is more like a revolving door. Similar to a personal credit card, the credit amount is the maximum you can borrow at any given time. Available credit is the difference between the maximum credit amount and any credit already spent.
Say you're granted a $10,000 line of credit for your business. If you use $5,000 of this amount in the first billing period, you'll owe $5,000 back to the lender by the billing due date. If you’re unable to pay the full amount, an interest fee will be included. Until this amount is paid, you'll only have the remaining $5,000 to use. However, once it's paid back, you'll again have $10,000 available to spend toward business expenses.
A loan, on the other hand, has a decreasing balance that goes away at the end of the lending period. If you borrow $10,000 to be paid back over five years, you'll be expected to make regular payments on a monthly basis for five years, plus interest. Every payment reduces the loan balance rather than freeing up credit for additional use.
How Much Financing Is Available with a Business Line of Credit?
How much you can borrow with a small business line of credit can vary. Factors like how long ago you started your company, how much money your company makes, and your own personal credit history can affect what kind of credit line a lender will give you. Most credit lines for corporate purposes range from $10,000 to $100,000, but can be more or less depending on the lender. Older, more established companies will usually qualify for more credit than a newer company that's just getting started.
How Long Does it Take to Get Approved?
For those who need fast access to money, a business line of credit is generally a good option. The approval process is usually faster than with other forms of financing, with borrowers getting approved in as little as 24 hours or as long as two weeks. Again, as with all forms of financial lending, certain lenders will be faster than others. Most lenders offering business credit lines will advertise their expected turnaround times, so you'll have an idea of what to expect when applying.
In order to increase the likelihood of a fast approval, be prepared to fulfill all of the bank's requirements, including evidence of cash flow, proof of incorporation to demonstrate the age of your business and any other applicable financial information.
What Documents Do You Need to Get a Business Line of Credit?
All lenders have slightly different requirements, but most business credit line lenders will want to see plenty of evidence that your company can make regular payments.
While a business line of credit doesn't have to be repaid in the same way a loan does, lenders don't make financial decisions hastily. Every year, thousands of small businesses default on loans or file for bankruptcy, leaving lenders to pick up the pieces. With most lenders, you can expect to present information that includes:
- A driver's license or other proof of identity
- A voided business account check
- Bank statements
- Financial statements, like a balance sheet and profit and loss statement
- Credit score information
- Personal and business tax returns
- A business plan or prospectus
This may seem like a lot of information, but this collection of documents can paint a strong picture of your personal financial health as well as the current and future performance of your business.
In general, the three things that mean the most in evaluating creditworthiness are your personal credit history, the duration of your business and its cash flow.
Personal Credit History: You may be thinking, "I'm not my business! Why does the bank want to know about my personal credit?" and that's a fair question. However, the way you maintain your finances as an individual can say a lot about how you'll run a company. If you have a lot of debt, fail to make payments on time and filed for bankruptcy in the past, it may not bode well for the financial health of your company.
Business Duration: Everything may look like sunshine and roses in the first few months of a company's operations, but a few strong months at the start doesn't necessarily mean there'll be smooth waters ahead. To ensure your company's operations can continue to support repayment of a line of credit, many lenders want to see a solid business history.
Some are willing to work with as little as six months, while others want to see a year or more. Regardless, you'll need to demonstrate that your business has been up and running for a while and your income is stable or growing.
Cash Flow: Cash flow and revenue are not the same thing. It's very possible to bring in hundreds of thousands of dollars per month with nothing to show for it. That's why cash flow — the amount coming in as well as the amount going out — is very important to lenders. Cash flow proves that a business is making enough money to pay off debt.
Operating cash flow is the cash your business earns from day to day operations, like selling goods to customers. This is the most important classification of cash flow, and the one lenders will care about the most.
The Cost of Repaying Funding
With a business line of credit, interest is only owed if the balance is not paid by the due date. For most credit lines, statements are issued once a month and show a closing balance. This amount is then due around 30 days later. If the statement balance is repaid in full, no interest is charged, which creates a risk-free way to use credit to fund business activities. If the entire amount can't be repaid on time, businesses are required to make a minimum payment. They'll also be responsible for the interest that accrues on the remaining balance.
Business line of credit interest rates differ from one lender to another. How much money a business makes can also play a role. A business with strong cash flow, a dependable history and an owner with good financial sense will generally result in lower interest rates. Rates can range anywhere from 5% to 25%.
Say, for example, you have a credit line of $10,000 with an interest rate of 15%. If you use $2,000 of your allotted credit in a single month and pay it back in full the next, there will be no additional expenses. However, if a payment of only $100 is made, interest will accrue on the remaining $1,900 — around $23 for the month. This amount may seem small, but as the outstanding amount increases, so do the interest charges.
The Terms of Paying Back a Line of Credit
The repayment terms for a line of credit are detailed in a monthly statement. The statement balance, or the amount that's been spent in the most recent billing period, must be paid back by the due date. It's okay to pay this amount in full or in part, as long as the minimum is paid. Minimum payments are set by the lender and may depend how much credit was used. In most cases, too many missed payments mean an account will be closed. This can seriously harm both credit score and brand reputation.
As long as all the rules are followed and payment deadlines met, a line of credit can be used to support business needs for years. As a potential long-term financing option, a line of credit is a great choice for those who want the flexibility to spend money as needed.
The Best Business Lines of Credit
Many banks and lenders offer business lines of credit. However, it's important to choose a name you can trust. This is what you can expect when considering lines of credit from big lenders.
|Lender||Amount||Speed of Funding||Personal Credit||Time in Business||Business Cash Flow||Cost of Funding||Payback Terms|
|AMEX||$3,500 - $50,000||3-5 business days||No Credit Check||24 Months||Minimum of $50,000||$0 Fees and 6.98% - 19.97%||12, 24, or 36 Months|
|Blue Vine||$5,000 - $250,000||As fast as 24 hours||600+||6+ Months||$100,000 in annual revenue||$0 Fees and 15.00% - 78.00%||6 to 12 Months|
|Kabbage||$2,000 - $250,000||As fast as 24 hours||Not Required||1 Year or More||>$50,000 Annually||1.5% to 10% Monthly Fee and 20% - 80% APR||6, 12, or 18 Months|
How to Get a Business Line of Credit
If your business needs access to a business line of credit to cover expenses, Lendzi can help. With flexible options and clear and understandable loan terms, we can make sure you find the perfect option for your business financing needs. Contact us today to learn more about our fast and easy lending options, or to start a loan application for your business!
The Pros and Cons of a Business Line of Credit
When you're dreaming about starting your own business, you'll need money to make it happen. A business line of credit provides continued access to funds to purchase everything from computers to sticky notes and is a great option to pay for smaller items and regular expenses that don't necessarily require a large loan. With many pros and fewer cons, a credit line for your business can be the tool you need to succeed.
Flexibility in spending and long-term use
Revolving access to credit
Easy application process
Lower threshold for approval
Fast approval with turnaround times of as little as 24 hours
High financing amounts with limits up to $100,000 or more
Reliable safety net for business emergencies