Business Lines of Credit – a Complete Guide

IN THIS GUIDE

Overview

As a business owner or as someone who one day seeks to own a business, you may find yourself in situations where your existing capital isn’t enough for you to efficiently operate or make decisions you want to make.

Thankfully, multiple financing options exist for all different types of scales and purposes.

Is your business low on cash? Do you need to make some tech upgrades in your office? What about a renovation on short notice?

Business lines of credit can help you tackle all of these issues (and more!) without an issue.

In this article, we’ll look at what business lines of credit are, how they work, how to get them, the differences between secured and unsecured business lines of credit, and much more.

Let’s dive in.

Business lines of credit: How they work

Business lines of credit allow small businesses to borrow a flexible amount of money. These businesses then pay interest on the money they borrow.

Business lines of credit operate like credit cards.

You’re given a limit on the amount of money you can borrow, and you need to make sure you repay your debts on time.

Unlike term loans, which are inflexible and loan fixed amounts of money, business lines of credit offer more freedom to utilize the loaned funds.

For example, say you have a $15,000 limit on your business line of credit. You can use $10,000 for a big expense, like a renovation. If you pay that $10,000 back on time, you can borrow up to another $15,000.

Business lines of credit are most often used to cover short-term expenses, and borrowing amounts are typically smaller than business term loans.

How to qualify for a business line of credit

Wondering how to get your business a line of credit?
It’s not difficult at all!

Here are 3 things you’ll need to qualify for a business line of credit:

  1. Credit Score and Financial History

While the exact specifications vary by lender, a high credit score will make it much easier to secure a business line of credit. A minimum score of 500+ usually lets you qualify, but a higher credit score will always make it easier to secure a line of credit.

Both banks and online lenders will often require that you have at least 6 months of operating your business, in addition to a set minimum annual earning (usually around $25,000).

The more established your business, and the higher your credit score, the easier it will be to access business lines of credit with quality interest rates.

  1. Financial and Business Documentation

Lenders need further confirmation that you will be able to make your payments on time.

Aside from your credit score and the necessary capital, you’ll need to submit your business’ tax return documents, financial statements, profit-loss documents, and any lease agreements.

Banks will also often ask for your projected income and expense reports, and they’ll want to know how you plan to reach your financial goals.

You’ll also need to verify your business because business lines of credit are only issued to actual businesses. Banks will ask for a business certificate or license, along with corporate seals or applicable documents.

If you have a business partner, he or she will also need to sign these documents or give written permission to approve your line of credit.

Online lenders are often less strict about proof of your business; in fact, some will only ask for a business checking account.

Every option will differ so gather all relevant documents just to be safe!

  1. Personal Financial Documents

Lenders will be interested in your personal financial history, especially if your business is new or you possess a limited financial history.

Most lenders will ask for the past few years (usually 3) of your income tax statements, information regarding other business investments, and potentially more. Again, it depends on the lender.

If you have all this documentation, then you’re good to go! Typically the approval process takes anywhere from a few days to a week or two.

Secured vs. unsecured business line of credit

Depending on the lender, your business line of credit may be either secured or unsecured.

But what exactly does that mean?

A secured line of credit means that you, the borrower, must use your own property as collateral in the event that you don’t pay your line of credit in time. This means that the lender can seize your property or money should you default on your loans.

Collateral can include things like your home, car, office supplies, or business accounts.

Unsecured lines of credit do not require you to present your assets as collateral. These lines of credit pose a more significant risk to lenders and thus come with more strict qualifications for borrowers. Additionally, lenders may still require some kind of lien or personal agreement on business assets despite offering unsecured lines of credit. Make sure to discuss these terms with your lender.

As always, research the lenders you’re considering. Determine whether they offer secured or unsecured loans, and pick what best suits your business’ financial situation!

Business lines of credit: Best options

If you’re seeking a business line of credit, you’re probably aiming towards a specific goal or utilizing it for a specific reason. There are tons of different reasons why people might consider a business line of credit—that means there are different options to consider.

In this section, we’ll discuss different situations where a business line of credit might be a good move.

Unsecured

Many unsecured line of credit providers can help you out with your business ventures. They don’t require collateral, provide quick access to funds, and won’t charge you interest until the funds are used.
Remember that almost all unsecured lines of credit come with relatively high-interest rates. Most also present specific fee structures that make it impossible for you to pay your credit line early.

Secured

If you have the assets to put up for collateral, consider taking out a business line of credit with a larger financial institution.

These larger institutions typically offer lines of credit between $100,000-$250,000. Although they require collateral for these larger loans, they also have very competitively priced interest rates.

These options aren’t the most accessible to all small businesses, given the large collateral requirements. However, if you do qualify, however, secured business lines of credit will save you money with their low-interest rates. Their application is straightforward, but you’ll need a moderately high credit score to be considered.

Startups

If you’re financing as a startup, consider a business line of credit that offers enough credit to comfortably begin operating your business, has low-interest rates and flexible repayment terms and comes without any additional fees.

These providers offer quick funds, up to $500,000 in credit, and don’t have any additional fees. However, depending on your personal and business financial history and credit score, you may face high-interest rates. If you can manage these rates, business lines of credit can be a great option for your startup.

Poor credit

Even if your credit score isn’t suitable for most lenders, there are options out there to cater to your financial situation! Some lenders will offer upwards of $250,00 in credit, even if you don’t have a great credit score.

Remember that a lower credit score means you’ll pay a higher interest rate. Typically, you’ll also have to cover a variety of fees. Despite these drawbacks, business lines of credit can still be a great option if you’ve been denied other loans.

Fast funding

Some lenders specialize in offering business lines of credit on short notice. They’re able to process transactions and set up lines of credit within a 24 hour period, which is great if you need to fund something on short notice. Their lines of credit usually range from $6,000-to $100,000.

Many fast funding lenders let you draw from their line of credit multiple times, as long as you have credit available.

While fast funding sounds amazing, be aware that many fast funding lenders typically offer only very high-interest rates and tend to cater to customers with a few years of business experience. They also require frequent payments that must be paid off in (usually) a year.

Fast funding options might be suitable for established small business owners, but they may not be right if you’re a new business owner, or if the repayment schedule and interest rates work against you.

The Takeaway

Business lines of credit exist in many different forms to meet a diverse set of needs.

Still, confused or unsure of which option suits you the most?

Use Loanbase!

By considering your individual needs and preferences, our platform matches you with vetted lenders and eliminates all the guesswork of applying for commercial loans.

What to consider when choosing a business line of credit

Credit Amount

One of the major factors that will determine the type of business line of credit you choose will be the amount of credit you need to access. Not every option will offer the right amount of credit on the terms that perfectly suit you. Do your research and understand your own personal credit needs.

Eligibility for a line of credit

You’ll also need to make sure you’re eligible for the line of credit you’re applying for. Has your business existed for a long enough time? Does it generate enough money on a weekly/monthly/yearly period?

Some lines of credit consider these things, so you need to be aware of what conditions qualify your business for a certain line of credit.

Additional fees/collateral

Consider any activation fees or collateral you may need to present for the line of credit. These fees can add up and may put a strain on your financial situation.

Also, think about collateral. You never know if a situation will occur where you can’t make a payment for your business line of credit. You’ll need to figure out what to do if the lender seizes essential assets from your business or your personal property.

Repayment terms and flexibility

Choose a business line of credit with repayment schedules that won’t put a significant strain on your cash flow. If you take a loan during a slow period of business, can you afford to make hefty weekly payments?

FAQs

When is a business line of credit a good idea?

If you own a business and need to fund a short-term expense, purchase inventory, or need extra money to help alleviate cash flow stresses, a business line of credit is perfect for you!

Which type of lender is best for a business line of credit?

The answer isn’t that straightforward. It depends on your specific needs and limitations.

Compare offerings at both banks and online lender options.

To find a lender suited to your needs, try our easy-to-use platform that connects you to lenders that will cater to your specific situation!

How can I qualify for a business line of credit?

Every lender will have different requirements in order to qualify for a business line of credit.

If you’re going through a bank, be prepared to show a credit score of 500+, business documentation and finance information, personal finance information, and potentially more documentation.

If you choose to use an online lender, most will just require proof of a business checking account. They also might ask for something more specific, so do your research and pay attention to what you’ll need.

Is it hard to qualify for a business line of credit?

Not at all!

But be aware that qualifications between lenders will vary greatly. While it may seem intimidating at first, there aren’t many things that you’ll need in order to qualify.

Just be sure that your business has been established and operating for long enough to qualify for the specific line of credit you’re interested in. Your business may also need to earn a certain amount of money in either monthly or yearly periods to qualify for certain lines of credit.

Final Thoughts

Business lines of credit are flexible financing options that help alleviate some of the short-term monetary stress on your business.

They exist in many forms, and each lender will have its own nuances that may or may not work for your specific needs.

We built Loanbase to take the guesswork out of applying for commercial loans like business lines of credit. We simplify and modernize the lender-borrower interaction to help you quickly identify lenders that fit your personalized needs.

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