Don’t need funding now but think you might in the future? Then, plan ahead with a business line of credit.
A business line of credit differs from other types of small business funding options. Most other financing options are taken out for a specific need. For instance, short-term funding is usually used to address a sudden expenditure. Conversely, a business line of credit is often acquired before there’s an actual need for funding.
A business line of credit can be used for various things, like purchasing new inventory, repairing equipment, managing cash flow, and financing payrolls. If you're searching for financing options for your small business, we invite you to complete our form to request funding.
How Does a Business Line of Credit Work?
When you want a personal line of credit, you get a credit card. Businesses have a similar option with a business line of credit, which can be used whenever extra funds are necessary. A business line of credit differs from a credit card in that they typically have lower interest rates, although that can vary by lender. Here are the main points:
- A business line of credit is revolving credit. It has a maximum credit limit; however, you don’t need to use the entire line of credit. Similarly, you only need to pay interest on the amount of credit used. Once that amount is repaid, it is available for use again.
- The funding amount for a business line of credit is quite large. The range starts as low as $1,000 and goes all the way up to $100k.
- The funding term has a wide range, too. You could be expected to pay it back in as little as six months or up to 20 years.
- The interest rate can be lower than other types of funding. The average range is from 7% to 25%.
The company that issues your business line of credit will decide how much money you can access through your line of credit. You don’t have to pull your entire line of credit every time you need extra funds. There will likely be a minimum withdrawal amount, though.
Up to $100k
Up to 20 years
7% to 25%
Between one week and four weeks
Business Line of Credit Requirements
Before requesting this type of funding, make sure you meet the basic requirements that a lender may look for:
- A minimum of two years of operating experience
- Collateral in the form of real estate, inventory, or accounts receivable
- Proof that you have a profitable business with enough revenue to pay off debt
Each lender will have their own requirements. Therefore, make sure you meet these before applying for a loan. Please note that finding a business line of credit for a new business will likely be difficult, as one of the standard requirements is having an established company.
Startup Business Lines of Credit
Startups should seek a line of credit from a lender that specializes in this vertical. It will be difficult for a new business to find any type of funding from a traditional lender, as one of the standard requirements is having an established company.
Also, a startup would likely need collateral to qualify for a line of credit.
Alternative financing options for startups also include the following:
- Equipment Financing: It is always easier to secure financing with collateral. Equipment financing comes with baked-in collateral – the equipment being financed.
- Bad Credit Business Loans: Startups that are also credit-challenged may be able to find a loan product geared toward those with lower credit scores.
- Merchant Cash Advance: While not technically a loan, a merchant cash advance is paid back through a portion of every credit card transaction. Brand new startups likely will not be able to secure this type of funding, however.
Business Line of Credit Rates
Interest rates vary by your credit score, payment history, lender, and current economic circumstances. That said, this loan product is reserved for established businesses with proof of profitability. As a result, these types of companies may enjoy lower interest rates.
Rates tend to be around 7% to 25%. Keep in mind that a loan beyond this range can be difficult to pay back
Advantages and Benefits
These are some of the main reasons that businesses sign up for a line of credit:
- Fast – It can be obtained even before a need for financing arises. You also only need to repay the amount you use. Therefore, it could be a good option if you want to be proactive about possible future expenses.
- Flexible – A business line of credit is revolving credit, allowing you to withdraw funds as needed to address cash flow problems, both big and small.
- Affordable – The interest rates can be lower than other ways to borrow. Also, many versions of this product are free to set up. Maintenance fees tend to be around $100 or less.
- Reusable – Businesses can draw from a business line of credit repeatedly as long as they pay back the money each time.
- Tax-deductible – The interest you pay will most likely be tax-deductible, which is not always the case with personal loans. In other words, if you have used your borrowed amount to purchase items necessary to run your business, you can claim the interest as a business expense and may qualify for a business tax deduction.
- Unsecured – Collateral is not usually required for this type of funding.
A business line of credit offers a solution to a problem before there’s actually a problem. That means you won’t have to scramble for funding when you encounter a cash-flow gap. You may even pay less interest than if you used a business credit card.
Here are some of the main disadvantages that you should be aware of before diving in:
- After you secure a business line of credit, it could count against you when you apply for other funding. Potential providers might see the line of credit as a liability. A provider must count your line of credit as debt, even if you aren’t currently using it. As a result, you could be denied other funding if you have an active line of credit.
- Many providers will require you to give updated financial records every time you want to borrow money.
- Some businesses spend money on unnecessary expenses just because the money is there.
- There aren’t heavy regulations regarding this type of financing. That means you will not be as protected as you might be using a credit card. Watch out for penalty fees for exceeding your limit, making a late payment, or not using the credit line for an extended period.
- The interest rate may be adjustable and change over time. Unlike a fixed rate set throughout the loan term, an adjustable interest rate can go up.
- Interest can add up faster than with a credit card. On a line of credit, the interest begins to accrue as soon as you take the money out, instead of at the start of the next billing cycle, like with a credit card.
Why Request Funding Through Lendza
Lendza has been in service since 2015. Throughout the years, we have helped numerous business owners like you request financing through our website.
Requesting an online business loan through Lendza is straightforward and hassle-free. Our innovative loan request process is user-friendly and takes only a few minutes to complete.
Lendza’s extensive network of reputable lending partners may increase your chances of qualifying for a loan. Our network of lenders also welcomes applicants with all types of credit scores.
We streamlined the business funding request process, making it possible to request funding and see your answer in the same place. You will see your answer within minutes of submitting our form.
Is it Possible to Find an Online Business Line of Credit?
At Lendza, we help you try to find a business line of credit or other loan product available. We follow the same 256-bit encryption requirements utilized by government agencies to ensure your data is always safe.
Best Uses of Credit Lines by Small Businesses
Most small businesses use their credit lines to support financing for operational expenses. These include:
- Equipment Expenses: You can use your business line of credit to repair or purchase new equipment.
- Cash Flow Gaps: A business line of credit offers quick access to funds to address seasonal revenue fluctuations and cash flow.
- Inventory Purchases: You can use your business line of credit to buy necessary inventory.
- Payroll: Similar to addressing inventory costs, it can also cover your employees’ salaries.
When Not to Use a Business Line of Credit
You should not use a line of credit for long-term financing. If you do, you risk not having the line of credit if an emergency arises. The line of credit should be used for short cash flow gaps that can be paid back quickly.
In addition to this risk, interest can add up quickly. As a result, you could find yourself in more debt than you can comfortably pay back.
It is also dangerous to use this product for frivolous expenses, such as eating out on business trips or paying for a company car.
Types of Credit Lines
There are four types of credit lines: secured, unsecured, revolving, and non-revolving. Make sure to familiarize yourself with each option before requesting one:
- Secured business line of credit: A secured line of credit is backed by collateral, such as a business asset or real estate. The lender can seize your collateral if you default on your loan. It typically offers lower interest rates than an unsecured line of credit.
- Unsecured line of credit: An unsecured line of credit doesn’t require collateral. However, you may need to have a solid financial history or business credit to qualify for one. If not, you may get lower spending limits and higher interest rates as the lender risk losing their funds if you default.
- Revolving line of credit: A revolving line of credit is a credit account that allows you to borrow up to your credit limit. You can repeatedly borrow against the same credit line once you repay the outstanding amount.
- Non-revolving line of credit: Non-revolving credit is a one-time credit account the lender closes after the credit line is paid off. This means that you cannot repeatedly borrow against the same credit line.
If you need financing for your business, complete our loan request form to see which financing options you may qualify for. A loan provider from our vast network of lenders may contact you to help finance your business.
Keep in mind, though, that a credit card can have higher interest rates than a line of credit.
Frequently Asked Questions
Depending on the lender, collateral may be required to secure a business line of credit. If you opt for a secured line of credit, you may offer your business, property, or equipment as collateral. However, keep in mind that the lender can repossess your assets if you default.
Lines of credit are typically used to cover short-term emergency expenses. Additionally, they are helpful when you are unsure how much you will need to borrow. Rather than taking out a large loan and paying interest on the principal, you can opt for a line of credit and only pay interest on the amount that is used.
A business line of credit can help build your company’s credit score if you use the funds responsibly and make timely repayments. If you are a new business, this can be a way to establish a credit history. However, keep in mind that your credit will be negatively impacted if you fail to make repayments.
In some instances, it may be better to opt for a traditional business loan. For instance, if you need funds to cover long-term and larger-sum business-related expenses, a loan may be a better option. Typically, business lines of credit are not suitable for long-term use.
If you have a business line of credit and don’t use it, you won’t be negatively affected. You can have a business line of credit as a safety measure, but you are not obligated to use it. However, keep in mind that the lender may close your line of credit if you don’t use it for an extended period of time.
A business line of credit is a fixed amount of money you can borrow. It can be unsecured or secured with collateral. It has a draw period during which you can use the available funds up to the credit limit. Then, the lender assesses the minimum monthly payment due and the term.
A business credit card works like a personal credit card. However, it is designed with the small business owner in mind. Most credit cards are unsecured; however, you may find some secured cards too. Like a business line of credit, they have a fixed credit limit. However, unlike a line of credit, you may keep the account active for as long as you like.
The credit card issuer will assess the minimum monthly payment due, usually 2% of the balance.
Typically, the interest rates for a business line of credit are lower than those for a business credit card and offer higher credit limits. So, it's often more cost-effective to use a line of credit. However, several business credit cards offer rewards like cashback and loyalty points, whereas lines of credit do not.
As the name states, a secured line of credit is secured by an asset. As a result, it typically carries higher credit limits and lower interest rates than an unsecured line of credit.
An unsecured line of credit is not guaranteed by collateral. As a result, it tends to carry lower credit limits and higher interest rates as they are riskier for lenders.