Business owners who need access to borrowed funds have a variety of options. When a lump sum is desired, a term loan for businesses or similar offering is often the most sensible way to go. However, when continuing access to revolving funds is more practical, a business line of credit is certainly worth considering.
If you’re looking to borrow capital for your business, here’s some information to help determine whether a business line of credit might be the best option.
What Is a Business Line of Credit?
A business line of credit is similar to a credit card. You can borrow as much as you want up to your limit, paying interest only on the amount you borrow and don’t pay off before the end of the statement period. Paying off balances allows you to avoid accumulating interest. Once you pay down your balance, that money becomes available to borrow again. You repay and re-borrow as often as you wish, provided you remain under your credit limit and make timely payments.
How Much Can You Borrow and Do You Need Collateral?
Business line of credit limits vary depending on multiple factors, typically ranging from $5,000 to $150,000. Most toward the lower end are unsecured—meaning they don’t require collateral—but limits at the higher end of the spectrum often do need collateral that can be seized if you don’t keep up with your minimum payments.
How Do You Qualify for a Business Line of Credit?
Every bank, credit union, and online lender has its own exact criteria. They generally look at your credit report, and for an established business history of at least a few years and strong revenue. When applying, be prepared to show your recent personal and business tax returns, financial statements (such as profit-and-loss statements and a balance sheet), and bank account information.
Again, you may need to put up collateral, especially for a higher credit limit of $100,000 or more. This is often a blanket lien on your assets or a certificate of deposit.
It’s usually easier to qualify for a business line of credit through an online lender than through a traditional bank or credit union. The trade-off, however, is that online lenders typically have higher interest rates.
Are There Drawbacks to a Business Line of Credit?
Every form of borrowing has pros and cons, of course, and a variety of individual factors affect the decision about which is right for you. Consulting a professional financial advisor is always a good idea. If a business line of credit sounds right for you, also consider the potential downsides.
This is a difficult type of borrowing to qualify for. While interest rates tend to be slightly lower than with a business credit card, there may be extra charges and fees that offset the difference, and there also aren’t reward programs like most business credit cards offer. Additionally, one of the greatest risks with credit is always the potential for misuse and ending up in a deep hole of debt.
What Is a Business Line of Credit Used For?
Business lines of credit are used for just about any business expense. Often, they’re applied toward buying new inventory or equipment, covering unexpected costs, or making improvements or expansions. They can also be quite helpful for cyclical businesses during their seasonal downturns. While many business loans are issued for specific purposes, a business line of credit is well-suited to companies just generally looking to better manage their cash flow.
It’s also worth noting that maintaining a business line of credit over time and always making your payments on time is an effective way to build your business credit profile.
