Are you looking for working capital financing for your business?
A business line of credit can finance short-term expenses, like payroll or inventory, and both traditional and online lenders offer business lines of credit.
This type of credit is instrumental in efficiently managing cash flow, purchasing inventory, or addressing unforeseen expenses. One of its key benefits is the interest structure - you're only charged on the funds you actually use, not the entire approved credit limit.
Though the application process for a business line of credit might differ from one lender to another, there are some universal steps you can follow. These steps streamline the journey to obtaining this versatile financial tool, allowing you to focus more on the growth and sustainability of your business.
What Is a Business Line of Credit?
A business line of credit is a flexible financing option, functioning as a revolving fund. Unlike traditional loans disbursed in a single sum, this credit line offers the freedom to access funds up to a set limit as and when required. It's particularly effective for managing day-to-day cash flow and covering ongoing business expenses.
In this arrangement, interest is only charged on the amount you actually use, not on the entire credit available. This feature distinguishes it from standard loans. A business line of credit may be offered in secured or unsecured formats, with the former requiring collateral.
Typically, these credit lines feature a draw period, usually lasting from one to five years, within which you can access the funds. Following this period, the repayment phase begins, where you repay both the borrowed principal and the accrued interest. The interest rates in many business lines of credit are variable, meaning the cost of the borrowed funds may change over time.
Get a Business Line of Credit in 3 Easy Steps
Determine Your Credit Needs and Eligibility
Assess how much credit your business requires, typically ranging from $2,000 to $250,000. Aim for a limit that exceeds your anticipated needs but remains within manageable spending boundaries.
Check your eligibility by evaluating factors like your credit history (ideally around 680, but some lenders accept lower), business revenue, and operational duration. Remember, these criteria vary between lenders, so understanding your business's financial position is key.
Research and Choose the Right Lender
Explore various lending options, comparing their offerings against your financial needs and eligibility. Choose between traditional banks and credit unions, ideal for established businesses with robust financials, or online lenders, more suited for newer businesses or those with lower credit scores. Pay close attention to factors like credit limits, interest rates, and specific lender requirements.
Prepare and Submit Your Application
Gather necessary documents, including tax returns, financial statements, business licenses, and incorporation papers. Once ready, submit your application either online or in person. The processing time can vary, so be prepared for potential delays. Upon approval, review and sign the loan agreement to access your credit line.
By breaking down the process into these three essential steps, you can navigate the complexities of acquiring a business line of credit with greater ease and clarity.
Navigating Business Line of Credit Applications: Key Mistakes to Avoid
When applying for a business line of credit, precision is your ally. Ensuring accuracy in your application, particularly with financial figures, contact information, and other critical details, is crucial. Any error, however minor, might not only delay the process but also potentially jeopardize your approval prospects.
Consistently monitor the contact information you provide, such as an email address or phone number. Lenders may reach out with further queries, making it vital to stay accessible for any communication.
Understanding the Costs and Fees of Business Lines of Credit
Different lenders impose a variety of fees and interest rates for business lines of credit. Before committing, it's wise to compare these charges to secure the most advantageous deal for your business.
Interest Rate: Interest accrues on the amount you draw from the credit line. This rate could be fixed, remaining constant over the loan's duration, or variable, fluctuating with market trends. Rates generally vary from 10% to 99%.
Draw Fee: Some lenders charge a fee each time you access the credit line, typically ranging from 1% to 2% of the drawn amount.
Payment Processing Fee: If opting for wire transfer, a fee between $15 and $35 may apply. Choosing standard ACH processing usually avoids this fee but might delay fund access.
Late Fee: Missing a payment deadline can incur a late fee, usually a percentage of the due amount, varying by lender.
Termination Fee: Should you decide to close the credit line before its set end date, a termination fee of 1% to 2% of the loan amount might be levied, though not universally.
Prepayment Penalty: Early repayment might attract a penalty, often 3% to 5% of the balance. Look for lenders who don’t impose this fee.
Top Picks for Business Line of Credit Providers
For those seeking a business line of credit, here are leading online lenders:
Toolbox: Toolbox collaborates with strong financing partners to bring SMBs lines of credit and other business capital. You can create a free Toolbox account to apply for a business line of credit, as well as apply for a corporate charge card.
BlueVine: Offering credit lines from $6,000 to $250,000 with starting interest rates of 6.2%. Eligibility requires a minimum personal credit score of 625, monthly revenue of $40,000 or annual $480,000, and a business operational period of at least two years.
American Express Business Blueprint™: The American Express® Business Line of Credit ranges from $2,000 to $250,000 with terms of six, 12, or 18 months. Applicants must have a minimum personal FICO score of 660, a business operational history of at least one year, a valid business checking account, and an average monthly revenue of $3,000. The total fees vary with the loan term and other factors.
Credit Score Requirements for Business Lines of Credit
To secure a business line of credit with favorable interest rates, a FICO credit score of 670 or higher is typically necessary. With a credit score falling into the fair or poor category (580 or below), securing a loan with low rates or even getting approved might prove challenging. However, there are alternative lending options available regardless of credit score. It's crucial to ensure that the repayments are manageable before committing to any financial obligations.
Comparing Secured and Unsecured Business Lines of Credit
The key difference between secured and unsecured lines of credit lies in collateral requirements. Secured lines of credit necessitate collateral, such as property or other valuable assets, which the lender can claim if you default on repayments. Conversely, unsecured lines of credit don’t require such collateral. Due to the increased risk to lenders with unsecured credit, they typically carry higher interest rates.
Advantages of a Business Line of Credit Over a Business Loan
A business line of credit trumps a traditional business loan in terms of flexibility. A loan involves receiving a lump sum upfront, repaying it over a set period, and incurring interest on the entire amount. On the other hand, a line of credit provides the option to access funds as needed. Importantly, interest is only charged on the amount you actually use, not the total available credit. This aspect makes it a more adaptable financial tool for managing business cash flow.
