A line of credit is a wise consideration for almost any small business owner. You have many choices, ranging from traditional banks to online fintech providers—including Fundbox, Kabbage, OnDeck, and BlueVine. To help you compare options for a business line of credit, this article provides a quick description of the key differences between them.
What is a business line of credit?
A line of credit provides an amount of capital that you can draw against—up to your credit limit—and repay over time. Similar to a credit card, most lines of credit are revolving; this means that as you repay the amount you’ve drawn, your available credit replenishes and you can draw against it again, repeatedly, without having to apply for a brand new loan. This makes a line of credit an attractive option, for once approved, funds can be accessed quickly, so your money is ready when you are.
Current with COVID
This article is current as of October, 2020, and the research cited herein reflects the state of the industry during the COVID-19 pandemic.
Key questions to ask
When considering your options for a business line of credit, we recommend you ask yourself the following questions, concerning the provider and what you need:
- Is the provider actively lending? When the pandemic struck, many lenders suspended accepting new applications, even though their website may have still displayed an active “apply now” button. Before applying, it’s helpful to try and verify if they’re looking for new customers or not. Fundbox never stopped accepting applications from new customers or originating loans to existing customers throughout the pandemic. On the other hand, the economic slowdown has affected all lenders differently. For example, Kabbage stopped approving new customers very early, in March, 2020.
- How much do you really need? While it may seem tempting to ask for as much money as possible, this comes with a risk. If you’re approved for more than you actually need, you might end up facing difficulty repaying whatever you use. You may be able to do more with a smaller amount (and therefore less credit exposure). That’s because, with revolving credit, you can reuse the funds as you repay them and the available credit amount replenishes.
How quickly do you need the money? Sometimes new business opportunities arise that require an immediate response; a new client calls with a fast deadline, or an old client has a last-minute request. If that happens, you might want to prioritize a lender with a streamlined application or a fast decision process so you can get an answer and confidently take on the new work if you’re approved.
Consider the application process
Every lender is different, and that extends to their application process, as well as their requirements and timeline. Before choosing a lender, learn about their processes and the information and qualifications they need from you.
- How much time does the application require? Look at each prospective lender’s form and estimate how long it will take you to complete the application. This is especially important if you need a credit decision in a hurry.
- What information do they require? Some information you may be asked for includes your company’s federal tax ID. Do you have such information handy? Many applications ask for personal details for each person who owns more than 25% of the business, to verify their identities. Plus, most applications will ask for some way to demonstrate the performance or economic health of your company. For example, they may ask to connect your business bank account or accounting software.
- How can they provide a credit decision? Just because the provider’s credit application is available online doesn’t mean they will give you a result in seconds. Sometimes lenders can take hours or even days. Fundbox’s application was optimized to give a fast decision—within minutes, for most customers.
Qualification criteria are just the beginning
Do you meet the eligibility requirements? Every lender has a different minimum criteria for deciding which businesses to extend credit to. You should note that even if you meet the minimum criteria, you won’t necessarily get approved. Many lenders take a number of different factors into consideration when approving customers—the minimum criteria simply being the first filter that applicants must pass through.
For example, while Fundbox has minimum requirements, a “typical” customer of ours exceeds those minimums and has around $300,000 in annual revenue and has been in business for years, not months.
Terms: the length of your loan
While possibly not at the top of each business’s list, loan terms are a key consideration when looking for a line of credit. Some companies specialize in longer payback periods while others ask to pay back quickly. Do you prefer monthly or weekly payments? Do you want to repay in 12, 24, or 52 weeks?
Customer experience matters
A business line of credit is a tool you might be using often, depending on your needs. We recommend you consider the product experience and availability of customer support before making a decision. Some companies have invested in design and have built a streamlined product. Others might lack that attention to user experience (UX). Design can affect the speed to which you can complete an application, draw funds, and even your overall satisfaction with the product.
Likewise, customer support (customer service) can be critical to your happiness with your business line of credit. Imagine if you had a question about the product, or a problem you needed to resolve, but no one would pick up the phone? Fundbox won the gold Stevie Award for outstanding customer support in the financial services category, but not all companies have invested in the team and technology needed to deliver a great experience over the phone and email.
While companies themselves can talk about a great experience or the awards they’ve won, a good indicator of the level of service they provide is the reviews their customers have written about them. Sites like Trustpilot or the Better Business Bureau allow customers to post their reviews with comments so you can get a better sense of their real-world experiences and what they like and dislike about the company and its line of credit.
The lender’s own stability
In a world of economic uncertainty, we thought we should add a section on company stability. If you’re going to apply for a line of credit with a company, you should consider whether or not you think the company will be around for the long run.
A few questions to ask yourself as you do your research are:
- How did they handle the pandemic? Did they continue lending?
- Did they fundraise recently or do they have money in the bank to handle economic fluctuations?
- Were they acquired by another company?
Fundbox was fortunate to raise over $170 million in 2019, and we have kept the vast majority of that money in the bank to protect ourselves from the unexpected. We continued originating new loans throughout the pandemic, and continued taking on new customers during that time as well.
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