What Are the Benefits of a Business Line of Credit?

Business Expansion, Business Guides

Jacques Famy Jr
Review By Todd Millman

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 further build your business.

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 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 works right here so you can decide 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. You can draw on the allotted borrowing amounts from your lenders up to a specific borrowing limit or credit limit. A line of credit and a credit card are similar; both are revolving credit facilities that allow you to practically borrow at will up to a credit limit. One key feature is the repayment timeline - the payments depend on your balance and the accrued interest.

  • The credit card and line of credit differ in terms of 'placement' - where, when, and how they can be used. For instance, certain payments, such as payroll, property leases or rent, vendor invoices, and other significant short-term purchases are used business credit lines and not a credit card.
  • Unlike other business loan products, such as short-term loans, you don't receive a lump sum of money upfront with a line of credit. Instead, your lender outlines a spending limit. The beauty of a business line of credit is its undisclosed use policy during application as compared to other loan products, offering immense flexibility to business owners in utilizing funds.
  • Business lines of credit are simple interest and only charged on the funds you use.
  • Repayments begin after you make a withdrawal, and once your balance is repaid, your spending allowance is replenished once again, providing an extended repayment term. Sometimes, you'll hear this funding option referred to as a 'revolving line of credit' for this reason, emphasizing its flexible repayment schedule.

Secured vs. Unsecured Lines of Credit

Like other loan options, your business line can be secured or unsecured. Secured lines of credit require collateral, like home equity, or a personal guarantee to affirm your compensation ability. It ensures payment by transforming liquid or tangible assets into a safety net for lenders if the borrower defaults.

Unsecured lines of credit don't require any collateral. Instead, you might offer a personal guarantee, effectively transforming your line of credit into a short-term loan where deferred compensation impacts the repayment of borrowed funds if your business defaults.

Collateral when applying for a business line of credit gives lenders, especially those reporting to credit bureau, more security. As a result, they may offer better terms, costs, and fees based on the expected compensation. Alternatively, an unsecured line of credit can be just as valuable to small businesses or startups, particularly if they or their owners have a poor credit history. In these cases, lenders may also require an upfront cash deposit as a form of compensation assurance.

Acceptable Forms of Collateral

If you can offer cash, liquid assets, or other guarantees to acquire a line of credit! 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
  • Inventory
  • Securities
  • Equipment or vehicles
  • Blanket liens

As the saying goes: cash is king, which holds when using money as collateral for a loan or line of credit. Generally, lenders like to see that you have genuine assets and cash.

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 understand better what's required to apply and, more importantly, qualify.

What You Need to Qualify for a Business Line of Credit?

Each lender will have a different set of minimum qualifications your business must meet to receive a line of credit. Your personal scores, business scores, annual revenue, and time in business, which can all easily be estimated using a credit calculator for a clear view, play a crucial part in your approval.

The underlying criteria generally include:

  • Being in the operational arena for at least six months, adhering to banking norms.
  • A personal credit score of a modest 620 (Better the credit, greater the chances for approval and best terms)
  • Available business credit bureau scores
  • A sound financial bottom line with an average of $200,000 in annual revenue.

While online lenders and the like are more flexible and expedient with their qualifications compared to traditional banking institutions, it’s essential to know that for accuracy and integrity in their decision-making process, you're still required to provide basic financial data. This data transparency not only demonstrates your creditworthiness but also acts as a cornerstone to your eligibility. In certain cases, lenders may request that you provide more comprehensive information for underwriting, such as:

  • Business bank statements showcasing your monetary transactions and earnings.
  • Profit and loss statements reflecting your cost and revenue structure.
  • Tax returns from the past few years to ensure fiscal legality and order.(not all cases)
  • Detailed exposition on accounts payable and receivable for evaluating financial health.(not all cases)
  • Balance sheets shedding light on assets, liabilities and capital, crucial for assessing business stability and helping in max loan determination.(not all cases)

The Pros: Benefits of a Business Line of Credit

Lines of credit offer several excellent benefits to small businesses. Let's take a look:

1. Flexibility

The primary benefit of a business line of credit is its flexibility. Utilizing this flexibility can aid in maintaining your cash flow. Be assured that our editorial content receives no direct compensation from advertisers, ensuring unbiased advice. With the newfound working capital to cover a multitude of business costs, your business functions much like a typical card.

As a small business owner, you'll find there's not much that can top that. Think of it as the financial advice powerhouse, on your behalf, highlighting many ways this particular business strategy can be advantageous to you. This editorial content ensures the information you're reading is accurate and thoroughly fact-checked.

2. Renewability

Lines of credit are known for their renewability since you can continuously draw on replenished funds after making your payments. Typically, these credit lines offer an annual renewal, but be sure to check if there's an associated yearly fee, which can sometimes reach up to $175. This is part of how terms and costs are restructured annually or semi-annually.

3. 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, in particular, are famed for offering the lowest interest rates for business financing. The interest rates, however, can always vary based on the lender. Many lenders also offer competitive rates with limited fees, flexible repayment terms, and APR discounts. If you're looking into SBA CAPLines for short-term or cyclical capital needs, the SBA provides a comprehensive submission checklist to assist you. With such financial solutions, businesses can potentially enjoy not only lower interest rates but also enjoy business-related perks and discounts.

Benefits of a Business Line of Credit

4. 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 provide swift access to working capital, akin to opening floodgates through a firewall, which proves critical during quieter seasons when stocking inventory pre-holidays or reaching short-term growth objectives. Line of credit platforms can act as an additional buffer in managing the ebb and flow of the cash cycle.

5. Builds Business Credit

Business lines are also an excellent way to improve your business credit or start building it all together. Making timely email notifications for payments due and observes a credit limit is beneficial; it means your credit score should continue rising. Key to this is the interaction with credit bureaus, as credit lenders who report account activity to them via daily or monthly email updates can significantly help you build your business credit.

Therefore, your choice in banking, especially one with robust email support for credit management, can have substantial effects on your business credibility, essentially turning your line of credit into a booster for your credit score.

Utilizing a credit calculator for your business line, coupled with consistent email reminders, may further aid in decision-making, forecasting your expected monthly payments, and helping maintain your payment schedule's integrity.

6. Covers Hidden Expenses

You can also use a line of credit to cover emergencies or unexpected expenses. For instance, the borrowing amounts acquired can be invested towards new equipment purchases or urgent repairs, replacing personnel or meeting other critical business demands.

Other uses include, you can allocate the funds towards payroll, since failure to properly compensate your employees is non-negotiable. However, be cautious to inspect these lenders ahead of time and remain vigilant for indications of predatory lending, including unfair and abusive loan terms. Being informed about your borrowing limit is crucial for responsible financial management.

7. 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. Business lines, where funding may be in short supply, especially startups, find the aid of these loans exceptionally beneficial. It doesn't matter if the costs seem minor initially, from hiring capable personnel to developing innovative new products - these small actions can have a significant impact.

Professionals and subject matter experts often opine on the influence of such investments on startups. Further, lines of credit make these investments achievable. Thus, short-term business goals can include strategies like:

  • Implementing robust advertising strategies
  • Hiring skilled personnel
  • Developing innovative new products
  • Updating facilities.

8. Can Be Unsecured

As mentioned above, lines of credit can either be secured or unsecured. Indeed, this feature makes lines of credit an ideal solution for businesses that may fall short of necessary assets to secure a traditional loan. An unsecured business line of credit is expedient for low-credit borrowers, who despite possessing a minimum credit score of 600, may access revolving funds up to $150,000 to use towards various business expenses. The borrower is authorized to draw from their line of credit as needed, paying interest solely on the actively borrowed amount.

9. Offered By the SBA

One last great benefit to business lines is that they're offered through Small Business Administration (SBA) loans and several other loan and financing options. Your small business can apply for the SBA's CAPLines, an efficient business line of credit specially designed to meet short-term or cyclical capital needs.

This program is hosted via approved lenders, who typically offer excellent rates with minimal fees. However, small business advertiser disclosure - be aware that the Small Business Administration CAPLines often involves a comprehensive submission checklist, lengthier application processes and approval times, thus this means you may not expect access to working capital within hours or days as you can get with online lenders.

The Cons: Drawbacks of a Business Line of Credit

1. Business Defaults

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.

2. Misuse of the Business Lne of Credit

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 financially put your small business in some serious hot water. As such, keeping your spending under control with a business line of credit is crucial.

Even with these few drawbacks, a business line of credit is still an excellent option for your small business for several other reasons, as listed above.

How To Use Line Of Credit?

A business line of credit functions as a revolving credit facility that allows a business to draw funds online or app on demand up to a credit limit. This concept, similar to a term loan's upfront lump sum and fixed repayment schedule, is often provided with adhering to certain editorial standards to ensure accurate information.

Our content, like the business line of credit, grants the flexibility to withdraw funds when needed, making it a great resource for startups. It can be used for any legitimate business purpose while facilitating improved cash flow and building a reliable business relationship with the lender.

Intriguingly, repayment involves the business only paying simple interest on the balance, not the credit limit, and this can be paid off early to save interest without incurring any prepay penalty. Thus, establishing a strategic and well-managed repayment schedule following our editorial guidelines not only aids in managing finances, but also works towards acquiring potential future credit line increase.

What can a business line of credit be used for?

  • Bridges the gap during shortfalls or cash flow fluctuations
  • Covers unexpected expenses or emergencies
  • Aids maintenance and repairs
  • Facilitates urgent purchases.
  • Utilized for improvements or expansions
  • Any legitimate business purpose.

Obtaining a Business Line of Credit

Small businesses can take multiple routes to receive the funding they need. The readily available financing options present choices between traditional banks, local credit unions, and online lenders. You can even kit yourself up with a business line of credit from an SBA-approved lender. However, beware, as the application process often proves to be more lengthy than alternative lending outlets such as websites.

While banks and credit unions might seem like your best bet, they often have more stringent eligibility requirements or a higher interest rate. On behalf of the hardworking small business owners, many find online lenders like AdvancePoint Capital offering the best rates for a business line of credit.

Typically, online lenders prove to be more casual with their paperwork, credit requirements, and other eligibility guidelines. For this reason, it's significantly easier for a small enterprise to get approved for a business line of credit through such a website. This flexibility could streamlines the financial decision-making process, giving entrepreneurs more confidence in deciding the path forward.

The Process to Obtain

When seeking a business line of credit, here are the steps to follow:

  1. Evaluate your borrowing amounts: Determine the credit amount you need and the speed at which you need these funds to accomplish your professional objectives. It's essential to mull over your company's overall financial health and comprehend your borrowing limit.
  2. Review lender requirements and repayment term: Every lender comes with different qualifications, benefits, and preferences. Knowing the credit calculator business line requirements of several lenders beforehand will broaden your options and encourage a competitive environment.
  3. Proactively gather documentation and data: Having necessary data and documentation ready will speed up the financing process. Make sure to confirm with your would-be lender about any specific documents needed.
  4. Apply and compute your repayment options: After meeting or exceeding the minimum qualifications of a few lenders, apply and compare the approvals you get using a credit calculator. This step allows you to negotiate better repayment schedules.

Remember that these steps might take a few weeks as lenders typically charge an origination fee for processing the application before meticulously analyzing your finance. However, with institutions like National Business Capital, this procedure can be significantly streamlined and hastened with a simple application process. Through such platforms, you can reveal multiple competitive offers fitting your eligibility on one diverse lender platform. Your timely repayment would help to foster "credibility" and "creditworthiness" with your lender, assisting in securing favorable terms in the future.

Line of Credit Vs Other Financial Tools

Business Line of Credit Vs. Business Credit Card

Entrepreneurs often wonder whether they should choose a business line of credit or a business credit card. Both financing products, granted by issuers such as American Express, Bank of America, and Chase, charge interest only on what you use rather than your total credit limit. However, the interest is structured differently.

A business line of credit is potentially more flexible than a business credit card. That's mainly because you can easily make a cash withdrawal against your line of credit, which is usually not an option with a business credit card. In essence, you can turn your credit line into a sort of short-term loan to meet various financial needs, including paying suppliers, salaries, or buying equipment. Business credit cards, on the other hand, may limit the kind of transactions you can make.

Moreover, lines of credit generally have lower interest rates than credit cards. They also offer better amortization schedules, often reported to major credit bureaus, which can reduce your overall borrowing costs.

On the flip side, business credit cards may offer rewards or cash back for your spending, something lines of credit might not offer. But remember these perks can easily be overridden by the higher interest rates if you carry a balance on the card. Additionally, some online lenders do not report to credit bureaus, potentially impacting your credit score.

In conclusion, if you need more financial flexibility and the ability to make cash deposits or withdrawals at relatively lower costs, securing a business line of credit, possibly even a cash-secured line that starts as low as $1,000, could be the right choice for your business.

Business Line of Credit Vs. Business Term Loan

A business line of credit and a business term loan are two very different financial tools. A line of credit, not unlike a credit card, allocates a borrowing limit or "borrowing amounts," allowing business owners to draw funds as needed. With a business loan, you only pay interest on the money used from this borrowing limit, offering a distinct advantage. Once it's repaid, following your "repayment schedule," you can dip back into those funds, thus providing repeated access.

On the flip side, a business term loan equips business owners with a lump sum right away, which is then paid back over a set "repayment term." Unlike drawing from a business line of credit, interest is charged on the entire loan amount, regardless of the amount utilized. Be aware that some lenders may impose "business loan prepayment penalties," so always review your loan agreement carefully.

Business term loans are typically targeted towards longer-term capital investments or larger expenses such as buying significant machinery or refurbishing a business location. Comparatively, a line of credit is adept at managing short-term, operational expenses (think payroll or bridging seasonal cash flow deficits).

So, when settling on a financing solution, consider your specific financial requisites, along with your business's financial health, and your extended and fleeting business ambitions. Evaluation of factors such as possible fees, your ability to stick to a "repayment schedule," and tolerance for potential short-term "repayment terms" can also shed light on the right choice for you.

Frequently Asked Questions

How much will a business line of credit cost?

The cost of a business line of credit can vary greatly depending on the lender, your creditworthiness, and the terms of the line of credit. Utilizing a credit calculator for your business line can assist in estimating these costs, with interest rates generally ranging from 3% to 27% or higher, depending on the aforementioned factors.

Lenders may also impose additional fees including:

  • Origination fee: $0 to 2% of the loan amount
  • Maintenance fee: You can expect a monthly or yearly charge for keeping the line open, typically waived in certain scenarios.
  • Annual fee: $0 to $175
  • Draw fee: $0 to 2% of the withdrawn amount
  • Late fee: Up to 5% of any past-due amount

Even minor increases in these fees can yield big savings, which is why optimally using the credit calculator is crucial. These values may seem small to start, but they can add up quickly over time, so be sure to take these fees into account when determining the total cost of a business line of credit. Lastly, always research your lenders well in advance to avoid falling victim to predatory lending practices.

Can I get a business credit line increase?

Yes, businesses can often seek a credit line increase after demonstrating a history of timely payments and responsible credit utilization. Bank or lender will assess the performance of the business, its record with credit bureaus, and other relevant factors before deciding on the request. Some lenders even offer borrower perks like free business coaching to aid in the decision-making process. If approved, the increase can essentially turn your line of credit into a max loan, providing additional flexible capital for the business to draw upon. It's always important to communicate with your lender, regarding their policies as some online lenders may not report to credit bureaus which could impact your business credit. Be aware that requesting a credit limit increase can potentially affect your credit score depending on the lender's method of conducting this process.

Key Takeaways

A business line of credit offers flexibility, accessibility, and several other beneficial qualities all companies, especially smaller ones, can utilize. This flexible financial tool is particularly well-suited to the dynamic world of startup businesses. You can use these funds for a wide range of needs, from covering unexpected expenses and urgent purchases to managing cash flow fluctuations or facilitating growth and expansion.

Obtaining a business credit line, particularly for startups, can involve a rigorous underwriting process. Most lenders, including major players like Bank of America, will likely need to see at least one to two years in business, a good to excellent personal credit score, and evidence of a certain amount of annual revenue. In some instances, however, a startup business line of credit can be approved with more lenient requirements.

While a business line of credit comes with significant benefits, including flexibility and renewability, future entrepreneurs should bear in mind potential drawbacks such as stringent qualifications and the possibility for misuse. Therefore, clearly define your financial aspirations and proposed business operations, ensuring they align with the chosen bank's criteria for max loan value. Make sure you weigh the pros and cons and select the banking option that best supports your startup.

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 the excellent benefits a business line of credit offers, 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!

Jacques Famy Jr

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