Who Can Qualify for Business Line of Credit: Pros and Cons
Do you want to launch a startup? Are you willing to grow your existing business? If you need to get supplemental funds to expand your venture you may benefit from obtaining a business line of credit. This is a special borrowing solution tailored to the needs of entrepreneurs. If you want to avoid pitfalls and learn more about this lending option and its features, keep on reading this article.
Business Line of Credit: What Is It?
Let’s start with the definition of this borrowing solution. What does a business line of credit mean? It is similar to a regular line of credit when a borrower gains access to a certain amount of cash and may utilize it for covering various expenses. A small business line of credit is a crediting option that helps consumers bridge the gap between payables and receivables.
This solution can be secured or unsecured. It can be a flexible borrowing option with annual renewal, no interest rates until the business owner uses the funds and no cash advance fees. You have the right to withdraw a flexible amount of cash and pay interest only on the sum you’ve got. In other words, a business line of credit differs from a regular business loan as it provides more features and flexibility to the borrower.
How Does This Lending Solution Work?
This lending solution is similar to a credit card. The lending institution offers you a limit and you may withdraw a particular amount of funds up to this limit to cover existing needs or urgent bills, purchase inventory or manage your cash flow. The entrepreneur has to pay interest rates only on the number of funds they borrow. They can withdraw and pay the debt off as they wish provided that they don’t exceed the mentioned credit limit.
As long as you make regular payments and don’t exceed your limit you may continue using your line of credit for different business expenses. The interest rate is only paid on the portion of funds a business owner currently uses. Many service providers allow consumers to repay their full balance earlier in order to save on interest rates. However, some online creditors may not offer this feature.
Secured vs. Unsecured Business Line of Credit
Similar to other lending solutions, business owners may obtain an unsecured or a secured business line of credit depending on circumstances and their abilities. If you want to get a larger sum of funds you may opt for a secured solution. It means property, inventory or other valuable assets should be put up as collateral to secure the debt. Remember that the crediting institution may seize these assets in case of a default or nonpayment. So, withdraw the amount you really need and try to pay the debt off on time.
An unsecured business line of credit is easier to get but the borrower may qualify for a smaller amount. There is no need to pledge any guarantee to get this lending type. Sometimes the lenders might demand a lien on a business’ assets or a personal guarantee though so make certain you check this information before you sign any contract. Traditional banks may require these documents as a type of collateral that can also be seized if the borrower defaults on a credit.
While you shop around for the best deal you should also ask the creditors about any papers or collateral that may be necessary to proceed with the agreement. Choose the most suitable solution for your business needs and remember that you may qualify for an unsecured lending option too. Generally, loan amounts up to $100,000 may be issued without guarantee.
How Can You Use the Funds?
Regular business loans are often issued to cover specific costs and business expenditures. Entrepreneurs don’t always have the right to spend the loan amount on other expenses. A business line of credit offers more flexibility and range of motion for each business owner as the funds can be utilized for a variety of purposes. You may buy seasonal inventory, finance payroll, bridge the gap between receivables and payables, etc. Getting this lending solution is useful if you want to have additional ways of managing your cash flow.
A business line of credit also differs from a term loan. Despite the fact that both lending solutions are unsecured and require no guarantee, a term loan offers a lump sum of cash that can be used for business costs. If you will need additional money you will have to apply for a new loan. A line of credit is a revolving lending solution similar to a credit card so you may withdraw the amount you need over a set term.
Where to Get a Business Line of Credit?
Before you decide that you want to obtain this lending solution you should compare options at several lending providers. According to Federal Reserve, the average small business bank loan amount is $633,000 while only 48% of small ventures have their financing needs met.
The main requirements include having a business for at least six months and having annual revenue of $25,000 in order to qualify for this borrowing option. You may opt for this solution at:
- Local Banks. Interest rates offered at conventional banking institutions are generally lower. But you will need to provide some documentation, bank account data, personal and business tax returns, and business financial statements to obtain funding here.
- Online Lenders. Interest rates offered at alternative lending places are typically higher. But the requirements are more flexible while some business owners won’t need to have paperwork or use collateral to qualify for additional funding. Unlike traditional banks, online lenders don’t have strict demands concerning several years of credit history or strong revenue of the business.
In conclusion, a business line of credit is a suitable lending solution for many entrepreneurs who need supplemental cash to cover their business needs or bring their venture to a new level. Choose the most appropriate solution tailored to your circumstances and current business needs.