How to Get a Business Line of Credit
What is a business line of credit, and how do you get one? What is the difference between a secured and unsecured line of credit? The article below will answer these questions. It’s also important to assess whether you need the line of credit and how it can grow your business.
A business line of credit can function like a business loan. However, the main difference is you can draw from the line of credit up to your maximum limit and have the funds deposited directly into your business checking account. You don’t have to use the entire credit limit, so you only use what you need.
You pay interest only on the amount that you draw, and not on your entire credit limit. With a business loan, you pay interest on the entire amount that you borrow. This gives you flexibility because you can draw and repay the borrowed funds. Typically, the lender will require a minimum payment each month to keep your account current, just like a credit card.
As long as you pay on time and don’t exceed your credit limit, you can use the line of credit as often as you’d like. If you want to save on interest costs, you can pay off the entire balance in advance.
There are two types of lines of credit: Secured and Unsecured
Secured Line of Credit
This type of line of credit is backed by an asset such as real estate, stocks, bonds and even an automobile. When the borrower defaults on paying back the line of credit, the lender can seize the asset.
On the other hand, an unsecured line of credit is not backed by any type of collateral. We’ll cover more about this option later in this article.
The business owner can use the funds from the secured line of credit for any business related expenses, including marketing, payroll and even equipment.
Because there is collateral involved, a secured line of credit often comes with better terms compared to an unsecured line of credit. These better terms can include higher credit limits and lower interest rates.
A secured line of credit is a great option for new businesses. Since the business is new without any financial or proven credit history, many lenders will view underwriting the startup less risky if there is collateral involved. It’s almost impossible for a startup to qualify for an unsecured line of credit.
The business can draw funds any time they need it, without needing to go through the underwriting process. Every time you take out a business loan, you’ll have to go through underwriting, which will impact your credit score.
Unsecured Line of Credit
This is a revolving line of credit that does not require collateral to secure it. It works the same way as a secured line of credit where you can draw and repay the funds. Since collateral is not required to secure this funding option, it is much more difficult to obtain. New businesses will have a hard time getting approved for this option since the lenders consider them high risk.
This funding option will typically require at least two years in business and require a minimum revenue from the preceding year.
There are several benefits to having an unsecured line of credit. First, it allows you to transfer funds from the line of credit into your business checking account, giving you fast access to money. This is advantageous to companies when you have an unexpected expense, or need to invest in a last-minute marketing campaign.
Another benefit is that you can develop business credit history. Many lenders report the line of credit to the business credit reports, so having on time payments will boost your business credit score. Having good credit will help your business get approved for future loans and credit lines.
Overtime, as you continue making on time payments, the lender may increase your credit limits, giving you more access to capital that you can use to expand your business.
How to Get a Business Line of Credit
When you are planning to get a line of credit, the first thing you must do as a business owner is to figure out your eligibility. Many lenders look for the following factors:
- Your business history
- Business and personal credit scores
- Your business monthly and yearly revenue. The lenders want to make sure you have enough monthly cash flow to cover any minimum payments.
The first step the lender takes is making an inquiry into your personal or business credit history, or sometimes both. With stronger credit scores, the better the chances of getting approved by the lender.
If you are a new business, the lender will likely ask you to secure the line of credit with collateral such as real estate. This lessens the risk to the lender in case you default on payments.
There’s the saying that the best time to apply for credit is when you don’t need it. This is true for the line of credit as well. When you have strong credit scores and business financials, this is the best time to apply for this funding option. Your business will have the highest chance for approval along with getting high credit limits.
To apply, you will typically need the following:
- Personal information
- Financial statements
- Information about the stakeholders
- Tax returns
- Debt schedule
- Business Tax ID
- Legal documents – corporation formation, licenses, contracts with third parties, etc.
Where To Get a Line of Credit
Your best chance of getting approved is by applying at your current bank where you already have an established relationship. There are also several alternative online lenders you can use.
Traditional Business Banks
- Chase
- Wells Fargo
- Bank of America
- US Bank
Alternative Online Lenders
- OnDeck
- BlueVine
- Fundbox
- Kabbage
Is a Business Line of Credit Right for You
The line of credit may be right for you if you need the following:
- Manage cash flow
- Buy inventory
- Pay for unexpected expenses
Having a business line of credit is advantageous because you can easily access cash while you are focusing on growing your business. If you are a startup, a secured line of credit can help you cover expenses like rent, product development and payroll.
Get qualified for business funding today by visiting our funding platform ROK Financial here.