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A line of credit is a common financial product that underwrites you for a certain credit limit. You can draw up to the maximum credit limit. Repayment often begins immediately after the funds are drawn. Many lines of credit are revolving, meaning that with each weekly repayment, the amount you repaid (minus the fees) becomes available again (within the credit limit and the timeframe outlined in their agreement if one is specified). Many small businesses use lines of credit as working capital or as a source of growth capital, especially when cash flow is tight.
Lines of credit are popular because of their flexibility. You can draw funds whenever you want, use them however you want, and draw the exact amount you want. This is important because you don't need to take on a huge term loan and make interest payments on more money than you need. A line of credit can also be useful for small businesses to have as an emergency source of working capital, used when something unexpected comes up.
Sometimes the flexibility of a line of credit comes with a price. Some lenders will charge you origination fees (a fee for entering into the loan agreement), maintenance fees (fees to keep the line of credit open when you're not using it), draw fees (a one-time fee you pay on top of the interest rate), and bank wire fees.
There are no standard credit scoring tools for small businesses. Enterprises have Moody's or Standard & Poor's rating services. Consumers have personal credit. But small businesses don't have either, so pretty much all small businesses end up using personal credit to get approved for a line of credit. You might find this problematic for three reasons: 1) you might want to keep your personal and business finances separate, 2) you might have low personal credit—though your business might be healthy—which could disqualify you, or 3) you might not want a hard pull on your credit report for fear it will affect your credit score.
Fundbox goes in a different direction with our line of credit product. We don't require personal credit to get started. We use a custom-built business health assessment to determine your credit eligibility and limit by reviewing the data you share with us. You only need to connect your business bank account—nothing else. Simple.
If you own a small business, you probably already know that sometimes you need a little extra cash. Even the most successful small businesses experience slow sales, late invoice payments, urgent unplanned expenses, and other short-term situations where cash flow is uncertain. In situations like these, access to some extra working capital can mean the difference between closing your business or surviving the tough times and coming out on top.
When considering financing, small business owners have an overwhelming array of different options available to them. A business line of credit is one of the most popular choices for small business owners. Read on to learn more about this type of financing, examples of why your business should have a line of credit, how to apply for one, and some alternatives to consider.
What is a business line of credit?
A small business line of credit is a financial tool that has much in common with a business credit card. Unlike a term loan, a small business line of credit does not provide a lump sum of cash that requires a monthly repayment schedule. Instead, it offers the borrower access to capital up to a certain amount. Similar to using a business credit card, you can access the capital as you need it to pay for business expenses. The balance on a line of credit is “revolving,” meaning that you can carry the balance from month to month and interest is calculated based on the amount you draw. As you repay that amount (called the “principal”), your available credit goes back up to your limit, allowing you to replenish your credit and use it again.
When small business owners start looking for funding, many start their search by researching term loans and business lines of credit. One key difference between those two options is that a business line of credit is flexible in ways a term business loan is not. With a business line of credit, you could borrow an amount up to your credit limit, and you would pay interest on the amount that you borrowed. Fees vary depending on the lender and the precise line of credit you choose; look out for inactivity fees, and other additional fees. The main constraint of a line of credit is that you cannot go above and beyond your credit limit.
Why Might You Need a Business Line of Credit
All businesses need cash to run their operations, but sometimes there just isn’t enough cash right when you need it. You might be waiting for your favorite big client to pay their invoice, or you might need to purchase an expensive new piece of equipment. Situations like these may seriously affect your cash flow and threaten the stability of your business. If you’ve got a line of credit in place, however, you can handle these challenges with confidence.
A business line of credit is useful for smoothing most liquidity or cash flow volatility problems that business owners commonly face.
With a business line of credit, you won’t have to worry because you will have access to funds when you need them most. Your credit line is simple to use, especially if you’re used to using a business credit card: Once you receive your funds, you can pay off the business line of credit to replenish it, and use it again when the next need arises.
Business lines of credit fall into two main categories: Secured and unsecured. Here are the main differences between the two types:
Things to Consider When Choosing a Business Line of Credit
It's generally easier to apply and get approved for a business line of credit before you actually need it. When you and your business are in a sound financial position, rather than a desperate one, you’re a much more attractive borrower from the point of view of a bank! You might think you don’t need extra cash right now, but if you’ve been approved for that line of credit, there’s no time limit on when you can use it, and you’ll then have a backup if you are faced with an sudden cash flow emergency.
If you do apply for a line of credit when you’re in a strong financial position, the lender will probably be more enthusiastic about negotiating interest rates and other terms and conditions, meaning you’ll get the most favorable deal possible.
If used wisely, a business line of credit is extremely beneficial and convenient monetary tool that can help your business become and remain successful.
Any lender will want to scrutinize your business credit history before it approves you for a business line of credit. We’ll outline the pros and cons of getting a business line of credit so that you can decide if it’s the right choice for your business.
Pros Getting a Business Line of Credit
Cons of Getting a Business Line of Credit
What are the requirements to get a business line of credit?
In order to get approved for a business line of credit from a bank, you’ll need to complete a thorough application process. When you apply, the prospective lender will review your financial statements and assets, and more. Here are some common requirements for getting a new business line of credit:
Where to Apply for a Business Line of Credit?
If your business is looking for an unsecured business line of credit, there are many lenders in the market. For example, credit unions, online banks, online lenders, commercial banks and community banks. Credit limits can be as low as $5,000 and as high as $500,000. On the low end, you would most likely be dealing with smaller banks or online lenders, since banks almost never go as low as $5,000.
If the business is less than two years old, certain banks will give a business line of credit in partnership with the Small Business Administration, or SBA. The SBA CAPLine program provides businesses that meet its requirements with four different business lines of credit for their temporary working capital requirements.
An Alternative: Why Not Try Fundbox?
Fundbox might be an attractive option for for your business, especially if you are just getting started. Fundbox, a fast-growing online lender, if approved, can provide your business a business line of credit that suits your needs and helps to quickly fill up the hole in your cash flow. There is no paperwork and no personal credit investigation to get started. You can be eligible for up to a credit of $100,000. The only real requirement is that your business must have been in business for at least three months.
Why might Fundbox be the best choice?
Fundbox just recently made it to the Forbes Next One Billion-Dollar Startups to keep an eye on in 2017. Read on to find out why and determine whether Fundbox is the right choice for you:
How to Use Fundbox?
To use Fundbox, which operates with most national, regional, and local banks and credit unions–over 12,000 financial institutions in all–you can just connect your business banks account, or you can connect your compatible invoicing or accounting software such as:
If you don’t use any accounting software from this list for your business, you can just connect a bank account and get started.