Business men discussing possibility to get a business line of credit

Business line of credit

A business line of credit is preferred among small and start-up businesses to get their capital for the operations needed within the company, such as manage cash flow, day-to-day operations and new opportunities. 

In addition, a business lines of credit also provide you with flexibility that regular business loans don’t. 

A line of credit is super similar to how credit cards work. Let’s say you borrow $150 000 – you pay interest only on money that you borrowed. Then you draw and repay funds however you want, unless you exceed your credit limit. 

A line of credit

A line of credit is an amount of money that a bank or credit union has agreed to lend you. You will only pay interest on the amount you borrow. You can basically draw as much as you want, up to a maximum amount for a set period of time. 

How does it work?

A business line of credit varies from a term loan, that provides a one-time sum of cash upfront, repaid over a fixed period of time. 

You can keep reusing and repaying a line of credit as much as you want, as long as you make it on time and you don’t exceed your credit limit. Most likely lenders will allow you to repay your balance in full earlier to save on interest costs. 

Borrowing limits of line credit typically range from $5 000 to $150 000, which means they are smaller than term loans. 

You have possibility to take line of credit with lower credit limits, that is mostly unsecured business, meaning no collateral is required. 

How to qualify for a business line of credit?

Traditional lenders, for instance banks, typically require businesses to have strong revenue and a few years of history to qualify. Bigger lines of credit will most likely require collateral, which can be of course taken by the lender if you fail to make payments. 

To apply for a business credit line, lenders require following documentation:

  • Personal and business tax returns
  • Bank account information
  • Business financial statements (balance sheet and profit and loss statements)
In many cases, you will need at least six months in business and $25 000 in annual revenue to qualify for a business line of credit. Even though, some lenders or providers don’t set a minimum credit score, you still might need a minimum credit score of 500 or higher. 

Online business lenders tend to have lower requirements than banks. In addition,  they will most likely charge you with higher rates than banks and might have lower credit limits.

Therefore, to qualify for a line of credit, you will need to be at least six months in business and have $25 000 in annual revenue.

Borrowers typically need a minimum score of 500 or higher to qualify for a business lines of credit. 

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Before applying, you should consider a few factors:

  • Credit limit
  • Requirements to be approved
  • Interest rate
  • Repayment period 
  • Annual review and renewal 
  • Any special rewards

Advantages

Taking a good care of line of credit might help your business credit rating. It can also improve your position for better loan terms if you need financing in the future.

Many experts suggest to first-time applicants to start a modest line of credit and pay off the debt as quickly as possible as a way of building a credit profile. 

Keeping your finances running smoothly can be very challenging. 

business line of credit as a common type of loan for businesses

A small business line of credit

A small business line of credit is recommended for the first-time applicants who has no experience whatsoever. In some cases, first-time applicants might get better interest rates than the ones who already applied. Just simply ask at your local bank for more details and apply if they offer you a decent deal that could be a simple solution for your business’ growth and cashflow. 

Conclusion

You can apply for a business line of credit even before you need it. Let’s say you are worried about your cash flow, so you want to make sure everything is fine. I highly recommend to know why you want the credit line at the first place, especially when presenting your application to lenders. 

Another suggestion is to lay it out for your lenders, such as showing them your cash flow cycle, any future gaps and how a business line of credit might fill in those gaps. 

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