Welcome to Part 3 of our 2018 Small Business Guide to Lines of Credit. In this series, we’re answering some of the most common questions that small business owners have about getting the funds to grow their businesses, choosing between funding options, and using those funds wisely. Today, we’ll look at the many types of lines of credit available to small business owners and offer tips on choosing the right one for you.
In this article, we’ll cover:
- Traditional Bank Lines of Credit
- Secured and Unsecured Lines of Credit
- Personal vs. Business Lines of Credit
- Real Estate Lines of Credit
- Alternative Lenders
Traditional Bank Lines of Credit
A survey by TD Bank reveals that, in 2017, 21% of small businesses were expected to seek a loan or line of credit. Most of them (72%) will approach their primary bank. However, according to the SBA, while a traditional credit line offers various benefits such as check-writing privileges, it tends to be the most difficult line of credit to obtain and requires substantial amounts of documentation to support the application, including financials, personal and business tax returns, incorporation and registration information, etc.
In addition, many require an annual review to maintain the line of credit. SBA cites a survey conducted by the National Small Business Association, which found that 29% of small business owners report having their lines of credit reduced in the last four years and nearly 1 in 10 had their line of credit called in early by the bank.
Secured and Unsecured Lines of Credit
As you research the credit line marketplace, it’s important to understand the difference between a secured and unsecured product and determine which is best for you.
- What is a Secured Line of Credit?
A secured line of credit requires the borrower to pledge their assets against the loan as collateral. Since this is a temporary liability, the lender may accept inventory or accounts receivable as collateral and likely won’t ask for large assets like equipment or real estate. - What is an Unsecured Line of Credit?
Most business owners looking to get a line of credit prefer an unsecured option because the lender does not require any assets as collateral. However, because this is riskier for the lender, there can be a higher bar for approval such as good personal and business credit and healthy revenues. Unsecured business lines of credit are often given for lower limits and at higher interest rates.
Personal vs. Business Lines of Credit
Another consideration as you survey the credit line market is the difference between a personal and business line of credit.
A personal line of credit is secured against personal property such as a house. On the other hand, a business credit line may or may not be secured against business assets.
A common form of a personal line of credit is a home equity line of credit (HELOC) which money seekers can obtain from a mortgage lender or bank. HELOCs (aka second mortgages) are used to fund major personal spending such as education, home improvement, and so on. They are often long-term, typically around 10 years.
Money from a HELOC can also be used to fund business growth. Many business owners like the fact that you don’t have to come up with a business plan or financial projections in order to get approved for a HELOC. Also, interest rates can be lower with a HELOC than with traditional business loans (since you assume the risk, not the lender).
However, there are trade-offs. The lender may seize your home, if you are unable to repay the debt. Given that about two-thirds of businesses with employees survive at least two years and about half survive at least five years (according to the SBA), you’ll want to evaluate the risk carefully.
Real Estate Lines of Credit
If you’re looking to expand your business by purchasing real estate or are a real estate developer you may want to consider a real estate line of credit. Unlike with a HELOC, where the credit line is secured by your home, a real estate loan requires no collateral, financial statements, and no appraisals. Instead, borrowers are assessed based on their personal credit score. Once approved for a real estate line of credit, you can draw on it as many times as you wish.
Alternative Lenders
With the rise of big data analytics and machine learning, there’s a new wave of fintech (financial technology) companies emerging to ease the pain of small business owners seeking funds. Now SMBs have options among alternative lenders who use many metrics to gauge business performance and creditworthiness, not just a single data point like FICO scores.
As one such alternative option, Fundbox might be what your business needs, especially if you are concerned about getting quick access to cash flow while keeping personal and business finances separate. If approved, you can get a line of credit via Fundbox Direct Draw that can help quickly fill the gaps in your cash flow. If approved, you could be eligible for credit, from a minimum amount of $1,000, up to a line of $100,000. There is no paperwork and no personal credit investigation to get started. If approved, you can click to draw funds anytime and repay over 12 weeks.
Here are a few of the benefits of using Fundbox:
- Transparent Fees – No surprises here. There are no application fees and no origination fees, just a weekly fee when you draw.
- Easy Eligibility – With no minimum credit score requirements, no collateral or monthly income requirements, and at least three months of business operations, you can access funds by the next business day after approval.
- Flexibility – If you are approved for Fundbox Credit, you can draw funds whenever you like. For each draw, you will pay us back over 12 weeks; pay us back early and we’ll waive all remaining fees. As you pay us back, your Fundbox Credit replenishes (minus the flat weekly fees), so you can use it again.
The Bottom Line
As you shop around for a business line of credit, consider the amount of credit you need, the interest rate, repayment terms, and of course, the lending products available to you. Maybe you don’t have time for all the paperwork involved, have only been in business for a short while, or are concerned about your credit score.
The emergence of new innovations in fintech mean expanded options for small business owners today. Leading the way is Fundbox, giving you more options so you can more easily control your finances, and the future of your business.
Missed the rest of the series? Find it here:
- Part 1: What Is a Business Line of Credit and How Does It Work?
- Part 2: 6 Ways a Business Line of Credit Can Help Grow Your Business
Thanks for reading our Small Business Guide to Lines of Credit. In our next article in this series we’ll learn about the tax implications of a business line of credit. Stay tuned.
