Getting a small business off the ground is no small feat. As you continue to grow and reach new goals or greater revenue levels, you’ll likely require funding to improve working capital and build your business even further.
Loans or a line of credit can be excellent choices to boost working capital, improve cash flow, purchase inventory, or cover other essential business needs for your company. However, a business line of credit is one of the best funding tools for small businesses because of its many unique benefits.
What Is a Business Line of Credit?
Now, you might already be familiar with lines of credit. However, if not, don’t worry; we offer a thorough description of how it all works right here so you can make an informed decision about what’s best for your business needs. Now, let’s take a look at the ins and outs of a business line of credit, plus its benefits, below:
How It Works
Essentially, a business line of credit works like a regular credit card, with a few minor exceptions. So, you can draw on the allotted amount of money from your lenders up to a specific credit limit. But, the primary difference is how you are allowed to utilize the funds. Credit cards have many more limitations on how, where, and when they can be used compared to a credit line. For instance, certain payments are only possible using business credit lines and not a credit card, including:
- Property leases or rent
- Vendor invoices
- Other significant short-term purchases
Unlike other business loan products such as short-term loans, you don’t receive a lump sum of money upfront. Instead, you are allotted a certain amount to spend up to your limit. Plus, you aren’t required to disclose the use of your funds when applying, like with other loan products. For this reason, business owners have a lot more flexibility when utilizing the cash flow infusion.
Fortunately, with a business line of credit, you only have to pay interest rates on the funds you use. After your balance is repaid, your spending allowance is replenished once again. Sometimes, you’ll hear this funding option referred to as a revolving line of credit for this reason.
Secured vs. Unsecured Lines of Credit
Just like other loan options, your business line can be secured or unsecured.
Secured lines of credit require collateral or a personal guarantee to prove your ability to make payments. Collateral is a liquid or tangible asset lenders utilize to ensure they’re covered if you default on a business loan or don’t repay what you owe.
In contrast, unsecured lines are obtainable without any collateral. However, you may offer a personal guarantee, which is essentially a promise to repay the money from your line of credit even if your business defaults.
Of course, offering collateral when applying for a loan or line of credit gives lenders more security, hence the name. Thus, the terms, costs, and fees are far better with an unsecured credit line. However, an unsecured line of credit can still be a massive asset to a small business, especially if the company or its owner has a poor credit history.
Acceptable Forms of Collateral
If you can offer any cash, liquid assets, or other guarantees to acquire a line of credit, that’s excellent! Here are a few examples of what you can provide to outlets like SBA-approved lenders to obtain financing for your small business:
- Cash assets
- Personal or commercial real estate
- Unpaid invoices
- Equipment or vehicles
- Blanket liens
As the saying goes: cash is king, which holds true when using money as collateral for a loan or line of credit. Generally, lenders like to see that you have genuine assets and cash on hand.
Can Small Businesses Qualify?
Put simply, yes! Lines of credit are a choice for your small business for many reasons. However, before you can utilize the freed-up capital from this product to meet short-term goals, you need to better understand what’s required to apply and, more importantly, qualify.
What You Need to Qualify for a Business Line of Credit
Different lenders establish minimum qualifications your company must meet to receive funds. Like other loan options, personal and business credit scores, annual revenue, and your time in business all play a role in your approval.
Typically, minimum qualifications will include:
- At least six months in business
- A personal credit score above 600
- Business credit bureaus scores
- An average of $200,000 in annual revenue
Online lenders are far more lenient with their qualifying factors than traditional outlets. Although, it’s important to note that while online lenders are less strict, you still need to provide some information to show your creditworthiness.
In addition to minimum qualifications, lenders might ask you to provide information to determine your ultimate eligibility for financing. Some standard documents and financial statements your company may need to provide to qualify for business lines include:
- Business bank statements
- Tax returns
- Profit and loss
- Balance sheets
- Accounts payable and receivable
Once you gather all the necessary personal details and financial statements, you should be ready to start applying for lines of credit with your chosen lender and take advantage of all its benefits.
Benefits of a Business Line of Credit
Lines of credit offer several excellent benefits to small businesses. Let’s take a look:
The primary benefit of a business line of credit is its flexibility. Since it helps maintain your cash flow, you can utilize the newfound working capital to cover various business expenses, just like a typical card. And when you’re a small business owner, what could be better than that?
Lines of credit are known for their renewability since you can continuously draw on replenished funds after making your payments. Typically, terms and costs are restructured annually or semi-annually.
Lower Interest Rates
Even unsecured lines are relatively short-term and low-risk for lenders, so they often come with great interest rates. Online lenders are especially renowned for offering the lowest interest rates on financing for business lines, but fees and rates can always vary by lender.
Improves Cash Flow
Although you’re not receiving a lump sum upfront like other loan options, lines of credit can still help improve cash flow. They give you fast access to working capital, which can be crucial during slower seasons, when stocking inventory pre-holidays, or meeting short-term growth goals.
Builds Business Credit
Business lines are also an excellent way to improve your business credit or start building it all together. As long as you make payments on time and stay within your credit limit, your credit score should continue rising.
Covers Hidden Expenses
You can also use a line of credit to cover emergencies or unexpected expenses. For example, the money can go towards new equipment or repairs, replacing an employee, or other immediate business needs. Or, you can put the funds towards payroll since failure to compensate your staff is unacceptable.
Funds Short-Term Goals
Another reason many businesses choose this option is to pay for short-term business goals that can help foster further growth. Although they might seem like minor investments, these small actions can vastly improve your business, and lines of credit make it possible. Examples of short-term business goals often include:
- Implementing advertising
- Hiring personnel
- Developing new products
- Updating facilities
Can Be Unsecured
As mentioned above, lines of credit can either be secured or unsecured. For this reason, lines of credit are an excellent choice for businesses lacking adequate assets for a secured loan or credit line.
Offered By the SBA
One last great benefit to business lines is that they’re offered through the Small Business Administration (SBA) along with several other loan and financing options. Your small business can apply for lines of credit through the SBA’s CAPLines program via approved lenders, who typically offer excellent rates with minimal fees. However, be warned; the Small Business Administration has lengthy application processes and approval times, so don’t expect access to working capital within hours or days like you can get with online lenders.
Drawbacks of a Business Line of Credit
Just like any other funding product, a business line of credit comes with some risk. If your business folds, you’re still personally liable for repaying what you owe, even after dissolution. Failure to repay the outstanding debts can result in a significant hit on your credit score.
Additionally, since it’s similar to a credit card, there is always a chance for misuse. For example, lines of credit can be excellent for covering hidden expenses, but abusing them or exceeding your credit limit can put your small business in some serious hot water financially. As such, it’s crucial to keep your spending under control with a business line of credit.
Even with these few select drawbacks, a business line of credit is still an excellent option for your small business for several other reasons, as listed above.
Obtaining a Business Line of Credit
Small businesses can take multiple routes to receive the funding they need. Between traditional banks, local credit unions, and online lenders, the financing options are virtually endless. You can even receive a business line of credit from an SBA-approved lender, although the application process is more lengthy than alternative lending outlets.
While banks and credit unions might seem like your best bet, they often have more stringent eligibility requirements or a higher interest rate. Instead, many small business owners go with online lenders like AdvancePoint Capital to find the best rates for a business line of credit.
Typically, online lenders are more relaxed with their paperwork, credit requirements, and other eligibility guidelines. For this reason, it’s much easier for a small business to get approved for a business line of credit through an online lender.
Is a Line of Credit the Right Choice for You?
The short answer to the above question is always yes. For instance, what business owner would pass up access to revolving capital to cover emergency expenses or continue to grow their company? With all of the excellent benefits a business line of credit has to offer, applying for a credit line with your chosen lender is a no-brainer. Fortunately, if you’re still unsure where to start, AdvancePoint Capital can help you find the best financing tools for your business needs. Contact us today!