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Small Business Line of Credit

If you own a small business, you are most likely always on the lookout for the best funding options available. Depending on the type of business you own, there are a few different options when it comes to financing your operations. Choosing the right source of finance can be a crucial decision in terms of the viability of your business – it’s a choice that shouldn’t be taken lightly.

One of the most popular forms of finance for small businesses is a ‘small business line of credit.’ This is a unique form of financing that has a range of different benefits for small business owners. Many lenders will also call this a ‘small business credit line’. Keep in mind that both terms mean the exact same thing.

This article will provide an in-depth overview of small business lines of credit and how they may be advantageous for your business. It contains all the information you need to determine if a business line of credit is a great source of financing for your firm. It will also attempt to provide you with as much information as possible on the process behind attaining a line of credit if you feel this is an appropriate source of capital for your company.

What is a Small Business Line of Credit?

A small business line of credit is a form of finance that is typically provided by traditional lenders, as well as various other financial companies. In recent years, a number of online lenders have entered the market place.

A small business line of credit is a form of ‘revolving credit’ – a credit card is another example of revolving credit. Revolving credit is a form of credit that only makes you pay interest on the money that you use. This means that if you never access your line of credit, you never have to pay anything back and you never have to pay interest on the capital. A small business line of credit is essentially a pre-determined amount of money that you can access if you need capital. If you opt to never access this capital, then you are not liable to pay it back. Once you apply for a small business line of credit, your lender will decide on how large your line of credit will be – if you use it and pay it back, you will then have access to re-borrow that capital.

Business Line of Credit

Does My Small Business Qualify for a Small Business Line of Credit?

The majority of small businesses in a good financial standing will qualify for a business line of credit. If you’re just starting your business, you may not qualify as the bank will not have enough information on you or your company to make an appropriate decision. This shouldn’t be seen as a deterrent, many business owners turn to traditional business loans for setting up their company, and lines of credit once their company is already established. It is important to note that the main factor behind new businesses being ineligible is that this form of finance is unsecured – meaning the bank has no collateral if you default on the money you owe them.  This means that they need to ensure your business model is sustainable.

Small Business Loan Vs Line of Credit

Many businesses like to take out more traditional forms of finance when they need funding for their operations. This can be handy, especially if you know the amount of money that you will need to pay upfront for something – perhaps you’re taking out a loan to pay for a new vehicle in your business. But small business lines of credit allow for greater flexibility, especially because you don’t have to pay any interest if you don’t end up using it.

 

Business Line of Credit

With traditional business loans, you are typically extended a certain amount of cash which has to be paid back over a set period of time – also known as the term of the loan. This is also usually at a fixed interest rate over the set amount of time. It allows you to know exactly how much you will be responsible for paying back, and how often you will have to make payments. With business lines of credit, you have a set interest rate that you are responsible for paying when you access the capital in your credit line. It means that you don’t have to plan for the exact amount of capital you may need. Instead, you can have capital set aside for emergencies or unexpected purchases. It must be mentioned that business lines of credit traditionally carry a larger interest rate than traditional bank loans.

Unlike traditional business loans, business lines of credit are traditionally unsecured forms of debt. Meaning that you don’t have to put up collateral in order to get the loan. This means there isn’t as much liability involved for you or your business.

Business Credit Card or Business Line of Credit?

Many business owners wonder what the point of a business line of credit is when you can just attain a business credit card from most major banks. This is a valid question as both a business line of credit and a credit card are forms of revolving credit. There are a few primary reasons businesses tend to opt for business lines of credit over traditional business credit cards. While business credit cards are very useful forms of capital in a business, especially if you have several employees who need quick access to capital while on the job, there are a number of advantages that business lines of credit offer over credit cards:  

  • Interest Rates – Business lines of credit typically have much lower interest rates than credit cards, meaning that you can save a significant amount of money, especially if you’re making large purchases.
  • Acceptability – Because you can access cash from a business line of credit, or pay invoices, there is a higher chance that you can pay for your needs. Some businesses won’t accept credit cards for bills over a certain amount because of high usage fees.
  • Payment Terms – With credit cards there are typically very rigid payment terms which can cause chaos for a business that has an ever-changing revenue stream – this is also true for traditional business loans. But with business lines of credit you can avoid these rules – many lenders allow for more flexibility when it comes to paying back your loan.
  • Access to Cash – This is something that many people forget when comparing forms of capital. Credit cards typically have large fees and interest rates associated with getting ‘cash advances’, while business lines of credit will allow you to avoid this entirely. Most business lines of credit have cash withdrawal facilities at no extra cost. This is a crucial advantage.
Business Line of Credit

Types of Use

One of the most important factors you should consider when deciding on the type of finance to attain is what you will be using the capital for. It’s reasonable to assume there are different uses for different forms of finance – you should make sure that you have a decent understanding of how you will use the cash you receive in order to ensure you’re being as cost effective as possible. Many businesses have lines of credit to make sure they have some capital in case of an emergency. In many cases, businesses use other forms of finance for their day-to-day needs, and use the line of credit as a ‘slush fund’ for a rainy day – remember, you don’t have to pay for it if you don’t use it. 

The following types of use are what many businesses use in their lines of credit for:

  • Emergencies – This has been mentioned previously, but is something that can’t be stressed enough. Small business lines of credit are perfect for those who are scared that their business can’t cope with an emergency. For example, your business has a major machine break and you can no longer fulfill orders – a business line of credit ensures you have the capital to buy a new one without the hassle of waiting for bank approval for a loan.
  • Seasonal Gaps in Cash Flow – Seasonal gaps in cash flow occur within numerous industries. Travel, agriculture, energy, and various other forms of business all typically have high-seasons and low-seasons. This means that you may find it hard to keep things going during the low-seasons. With a small business line of credit, you can make sure to be prepared for when your sales dip – and you won’t have to pay interest if you don’t use it.
  • Responding to Trends – Perhaps your business suddenly takes on a new client or becomes more popular. Or maybe it’s Christmas and your foot traffic is through the roof – any of these instances will call for you to take on more staff or increase you inventory. By having a business line of credit, you can be more equipped to changes in demand by being ready to make sudden increases in employment or inventory.
  • Taking Advantage of Opportunities – This is similar to responding to trends, but it is still important to mention. You may find that opportunities present themselves that require quick investment. Perhaps someone is selling machinery that you need at a much more reduced cost than normal – traditional business loans can take too long to be approved if you need capital at short notice.

There are many other uses for business lines of credit, these are just a few examples that past business owners have found frequently occur.

    Business Line of Credit

    The Process

    The process of getting a business line of credit can often be less arduous than for traditional forms of credit, this is one of the main reasons business owners find this form of finance so attractive. The idea of an application that can take numerous weeks to be approved, as well as organizing various assets to be put up as collateral, can be intimidating for many small business owners.

    But this isn’t to say that the whole process is pain free, you will have to provide documentation to show you have a viable business if you want to get a small business line of credit. Because small business lines of credit are unsecured, it is often difficult to get a small business line of credit with bad credit.

    It’s also important to note that some of the best business line of credit lenders are actually located entirely online. You don’t have to go into a physical bank to get a business line of credit, you can upload documents online and be approved quickly if you have the relevant information. You will see that we have plenty of recommendations for online lenders on our site.

    You should begin by going to various lenders to compare small business line of credit rates. Once you determine the most affordable rates for your particular situation, you should start to determine which small business line of credit requirements your company can most easily meet – each lender will have different requirements for qualification. It is important to note that there is no best bank for small business lines of credit – it will depend on the type of business you have, and the industry you work in. Various factors will determine the interest rates and limits the banks offer you.

    If you do opt for an online lender, check out our lender comparison section for more information on the requirements and benefits of each lender. You can quickly determine whether you are eligible for their services by looking at their baseline requirements. You can also determine if they’re a good match based off their lending capabilities and interest rates.

     

    Is There a Limit on What I Can Borrow with a Business Line of Credit?

    There is a limit on the amount of money you can spend – the bank will set this limit when you apply for the line of credit. And there typically is an upper limit on this limit – although many larger businesses have lines of credit that go into the millions. It is important to note that having an extremely large business line of credit balance may not be the best idea, as interest rates are comparatively high. If you are planning on spending millions of dollars in the near future, you can probably save considerable money by using a different form of finance – especially if your business is young.

    Advantages

    There are many advantages in attaining a business line of credit for your business. We’ve provided some of the most prominent advantages in the list below:

        • Flexibility – One of the most evident advantages of a business line of credit is flexibility. With this form of capital, you will be able to use it for any expense you find necessary at any time. In addition, you’ll also have the freedom to never use it at all.
        • Cost Effective – This depends on what you’re comparing it to – but if you’re looking to get a form of revolving credit, a business line of credit is definitely one of the most affordable options.
        • Access to Cash – Unlike with credit cards and other forms of credit, most business lines of credit allow you to have access to cash if you need it. This means that you can use cash and write checks for items whose distributors do not accept credit cards.
        • Peace-of-Mind – One of the main advantages of having a small business line of credit is the peace-of-mind that comes along with it. No more are the days that you stay awake at night worried that an expense will leave you overdrawn or without capital. A small business line of credit means you can respond to emergencies and unexpected events with ease.
        • Taking Advantage of Opportunities – Every small business owner knows that opportunities often arise out of nowhere. Being able to invest at short notice is one of the most critical advantages in having a small business line of credit.
        • Unsecured – Another reason a small business line of credit is attractive is that it is often unsecured, meaning you don’t need to put up collateral in order to attain one.
        • Responsible Use Improves Your Credit Score – Like any form of credit, responsible use of a small business line of credit will result in an improved credit score. This is a great way to build your credit score if you’re a young business, or if you’ve had mild credit problems in the past.

    Disadvantages

    While there are many advantages of a small business line of credit, there are also some disadvantages that are worth noting. Like all forms of funding, small business lines of credit are not perfect for everyone, so it’s important to make sure that you are aware of the disadvantages before you make a decision:

        • High Interest Rates – While they’re a great deal when compared to other forms of revolving credit, they’re not a great deal when compared to other forms of finance in general. Traditional business loans typically have much lower interest rates, although you will have to pay interest on the loan whether you use it or not.
        • Credit History Needed – Because most lines of credit for small businesses are unsecured, you need credit history to prove that you can pay back the money you borrow. Many traditional loans have collateral when you start your business (such as equipment), whereas an unsecured small business line of credit doesn’t. For this reason, getting a line of credit for a new small business can be very difficult.

    Should I Get a Small Business Line of Credit for My Business?

    Determining whether you should get a small business line of credit can be a difficult process. If you’re a business that never experiences gaps in cash flow, doesn’t have to worry about emergencies, and plans on having regular expenditure throughout the duration of your company’s life, a small business line of credit might not be right for you. But most of these things simply aren’t true for the vast majority of business owners, and that’s why it’s important to consider getting a small business line of credit.

    Many business owners don’t use their small business lines of credit often, they’re more of a backup for if something goes wrong within the business. For this reason, many borrowers use these lines of credit along with other forms of finance. For example, a business owner may use a traditional business loan to finance his initial machinery and rent, but as he develops a credit history he may get a small business line of credit in order to ensure that he has an emergency slush fund should a problem arise. There aren’t many disadvantages in getting a small business line of credit, as you don’t have to pay for any part of the line of credit you don’t use. For this reason, a small business line of credit is a great option for the majority of small business owners.

    Verdict

    A small business line of credit is a great choice for most small business owners. This unique form of finance allows business owners the flexibility they need to make the right financial decisions. Gone are the days that you have to take out traditional business loans in order to finance investment or emergencies in your business.

    By attaining a small business line of credit, you are being a proactive business owner that prepares for the worst and the best. There is always a chance an opportunity to invest in excess capacity occurs, and by that same token there’s also a chance an emergency occurs. A forward-thinking business owner is a responsible business owner – don’t put the health of your company at risk by being negligent to the ever-changing business landscape.

    If you wait to attain a small business line of credit when you need capital, there’s a chance that it won’t be approved in time to get you the money you need. Business credit cards are great for a variety of uses, but they don’t give you the low-cost access to cash that a line of credit can. Check out the top-rated business line of credit companies on our website – there are some awesome lenders available online that take the pain out of the process.