Many small business owners have only heard of a few ways to fund their businesses. The most popular business financing options include term loans, equity financing, or business credit cards. Yet, another extremely advantageous option is overlooked because it’s not as popular as a traditional small business loan. This is the Business Line of Credit.
When small business owners learn how business lines of credit operate, their first thought is, “Why don’t more small business owners use this?” A business line of credit is like the best of both worlds. It allows you to access funds without the various hassles or costs that come with other options. You could even view a small business line of credit as a “secret weapon” to bail you out of unforeseen cash flow problems or help you capitalize on unexpected opportunities.
An unsecured business line of credit functions almost like a business credit card. You have a credit line from which you can draw funds anytime. If you’re carrying a balance, you’ll have a minimum payment. You only pay interest on the portions that you borrow. And when you pay off a part of your balance on time, that money becomes available again. This is because most business lines of credit are technically called “revolving” lines.
A small business line of credit should be a priority because it could be critical to a small business’s success. Unlike other small business loans, you don’t need to reapply each time you want to use the money available. And as the Small Business Administration (SBA) points out, small businesses need access to cash to survive and thrive.
Online lenders also make it easy to apply for and renew your small business lines of credit. Most lenders online don’t require financial statements or tax returns like traditional lenders might. While a small business owner might receive lower credit limits from many lenders for not providing tax returns or financial statements, the best business line of credit for their short-term financing needs may not require those documents.
Once you borrow funds from your small business line of credit, you must pay interest and have a minimum payment like business credit cards. Depending on the lender, your first payment could be due the following week or at the end of the month. If you repay what you borrowed on time, your business line of credit replenishes. For example, your monthly payment is $200, and your interest is $10. If you paid back $200, your credit line would go back up by $190. Your interest rate depends on how quickly you pay off your total balance.
Sometimes, you may have to pay a small fee (a.k.a. a draw fee) whenever you draw from your business line of credit. Typical draw fees range from 1.6% to 2.5%.
Though you’ll have a repayment term, that’s just the due date for your total balance. As long as you pay back your whole balance by that date, the entire credit line will likely become available again. Most lenders even allow you to pay off your total balance early to save on interest. Thus, as long as you keep paying off what you borrow and don’t exceed your credit limit, the credit line is essentially yours forever.
Borrowing limits tend to range from $1,000 up to $1,000,000. Interest rates start at 8%, with terms of up to eighteen months.
Also, small business lines of credit with lower credit limits and higher interest rates are usually reserved for unsecured business lines. You don’t need collateral, such as business assets, though you may have to sign a personal guarantee. However, suppose a small business owner wishes for a higher total credit limit. In that case, they’d opt for a secured business line of credit by putting up collateral such as real estate.
In 2022, 94% of small businesses experienced a financial challenge, such as supply chain issues, hiring or retaining staff, or cash flow gaps. Source: 2023 Small Business Credit Survey
53% of business loan or line of credit applicants that were rose to 53% in 2022, up from 46% in 2021, but still below the pre-pandemic level of 62% in 2019. Source: 2023 Small Business Credit Survey
With traditional small business loans, you must make monthly payments, plus interest, no matter what. Payments start immediately after funds are distributed, even if you haven’t used any borrowed capital. With a small business line of credit, you only have minimum payments when you use the money. Some lenders even offer an access card to use in stores and for online shopping.
A small business line of credit is the perfect solution for unexpected misfortunes or opportunities. These things happen all the time in the business world, and every company will eventually need extra cash. Maybe one of your retail items is drawing an unexpected level of demand. You’re on the verge of selling out but don’t have the money to order more items. This is where a business line of credit comes in handy.
On the other hand, demand can also fall unexpectedly. In this case, a business line of credit could act as a cash cushion and allow you to continue running your company.
Sure, you could seek other options, like traditional small business loans. But you’d have to shop for affordable rates, prepare documents, fill out applications, etc. A business line of credit goes into your back pocket and stays there.
Business lines of credit have higher borrowing limits than business credit cards. If you borrow close to your credit limit for a business credit card, your interest will skyrocket, and your credit score will plummet.
Lastly, business lines of credit typically carry looser requirements than other options. You don’t need an excellent personal credit score, high annual revenue, or more than one year in business to access enough funds to keep your company alive during an emergency.
Over the past decade, business lines of credit have become increasingly accessible. Many online lenders can approve secured & unsecured lines of credit in under 24 hours, even if you have bad credit or a troubled credit history. However, these products tend to have higher interest rates. And you might not be able to access more than $1,000,000.
A traditional business lender may offer lower rates and higher borrowing limits in exchange for steeper requirements. You may need high annual revenue, at least two years in business, and excellent credit. Collateral may be required as well, putting your business assets at risk.
Another disadvantage to a business line of credit is that the best time to apply is before you need it. If you apply when your company is doing well, you’ll likely access higher borrowing amounts and lower rates. You probably won’t access the same conveniences if you apply when your cash flow suffers.
This segues into a significant reason business lines of credit aren’t as popular as other options. Most business owners are notoriously busy. You must find time to apply amid your hectic schedule to access the highest possible credit limit. When their businesses are doing well, applying for small business loans is likely the last thing on their minds. It’s simply not natural to think about applying for loans when you don’t need the money.
| LOAN TYPES | MAX AMOUNTS | RATES | SPEED |
|---|---|---|---|
| Merchant Cash Advances | $7.5k – $1m | Starting at 1-6% p/mo | 1-2 business days |
| SBA Loan | $50k-$10m | Starting at Prime + 2.75% | 8-12 weeks |
| Business Term Loan | $10k to $5m | Starting at 1-4% p/mo | 1-3 business days |
| Business Line of Credit | $1k to $250k | Starting at 1% p/mo | 1-3 business days |
| Receivables/Invoice Financing | $10k-$10m | Starting at 1% p/mo | 1-2 weeks |
| Equipment Financing | Up to $5m per piece | Starting at 3.5% (SBA) | 3-10+ business days |
| Revenue Based Business Loans | $10K – $5m | Starting at 1-6% p/mo | 1-2 business days |
Eligible small businesses must be in business for at least six months and have a minimum credit score of 575. You must also prove that your company is currently earning a profit. If approved, you can get funded in 1-3 business days.
Here’s how to get started:
Unlike other loans, business lines of credit are often not pursued with specific investments in mind. After all, you’re supposed to apply before you need the money. For this reason, aspiring borrowers might not know exactly how much funding to request. So, think about how you’ll most likely use your funding and why you are applying in the first place. This will help us understand why you’re requesting this amount.
You might not need all of the following documents depending on your creditworthiness. However, it’s better to have them on hand just in case:
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about surprises or hidden fees during repayment.
If and when you’re approved, funds should appear in your bank account in 1-2 business days.
A small business loan isn’t just a way to get financing for your company. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of small business loan you get, make all your required payments on time and in full. If you get a business credit line or another form of revolving credit, keep your balance below the credit limit and follow all the terms and conditions.
Consistently making your payments on time and in full will positively impact your credit. And that means preferred rates and terms when you next need a business loan.
If your application gets declined, it might be because a small business line of credit isn’t the right tool for your financing needs. In this case, we might recommend other loan options – including working capital loan offers or an unsecured line of credit – like business credit cards, or even a personal loan, both of which can be obtained through our partners. Once you establish a solid payment history with either option, you may see a different outcome if you apply for working capital a second time. You’ll also better understand which expenses can be covered by a business credit card and how to use your borrowing limit best.
Another possibility is that you were declined due to poor personal credit scores. If so, you should consider our credit repair services. We can help you boost your personal credit scores by eliminating the issues that are keeping them down. We can also help grow your business credit rating with business credit bureaus if that is why your company was declined. The Small Business Administration (SBA) generally requires excellent credit, so working on your personal and business credit scores always makes sense. Credit unions are also a wonderful outlet for a business line of credit. If you are a member of one, credit unions often have great rates and programs to offer their members.
Due to the lower borrowing limit, shorter terms, and interest system, it’s best to use a business line of credit for short-term initiatives. Examples of when working capital needs a boost include ordering inventory, covering operational business services expenses for a month or two, or a lump sum for hiring more workers for a last-minute project.
This depends on your ability to meet requirements like minimum credit score, annual revenue, or time in business for business lines of credit. If you can meet these requirements with flying colors, you might consider seeking funding from a bank or credit union. These lenders offer higher borrowing amounts, lower rates, and longer terms. However, their application process is considerably more involved than that of an alternative or with online lenders. And you may have to provide collateral. Thus, if you cannot meet these requirements, you may still be able to access a substantial borrowing amount for a business line of credit through online lenders, even with bad credit, secured business lines, or unsecured.
This is one of the first questions you should ask when seeking a credit line: Is the product revolving or non-revolving? With a revolving line of credit, paying back what you borrow makes those funds available again. As long as you continue to pay off your total balance, your terms and interest rate stays the same.
A non-revolving line of credit, on the other hand, does not replenish when you pay off the total balance. You borrow, pay it back, and then it’s gone.
An unsecured business line of credit is like a revolving credit card with a higher borrowing limit and lower interest for business line of credit rates. Hence, this decision primarily depends on the cost of the expense at hand.
A business credit card might be better to cover a few minor, recurring expenses. You should pursue a small business line of credit to cover more considerable temporary costs. To clarify, a small business line of credit makes more sense when you regularly need extra cash for more substantial expenses. On the other hand, a business credit card is best for minor expenses that don’t increase in cost.
Will a small business line of credit work for you? At United Capital Source, we’ve helped get revolving credit lines for hundreds of industries, from retail to landscaping to auto repair. This option is probably your best if your company experiences seasonal fluctuations. When considering a small business line of credit, ask yourself these questions:
Do I need…
If you answered yes to these questions, then credit business lines are probably the right choice for you.
This product is available to borrowers with bad credit, but your borrowing limit may be lower, and your interest and terms will be less convenient – i.e., you might not get the prime rate for the product. However, if your cash flow is solid, poor credit may impact your borrowing limit, interest, and terms less.
We’ve repeatedly mentioned that the best time to apply is before you actually need the money. Thus, if you’re concerned about poor credit or business credit score impacting your borrowing limit or interest, you should improve your minimum credit score before applying. UCS even offers credit repair services for this exact situation.
A secured business line of credit requires collateral to back up the loan, such as business assets or property. This reduces the risk for the lender, allowing for potentially higher credit limits and lower interest rates.
On the other hand, an unsecured business line of credit does not require collateral but typically has stricter eligibility requirements and may come with higher interest rates. Businesses must weigh the benefits and drawbacks of each option to determine which type of credit best suits their financial needs and risk tolerance.
Fraud Disclosure:
Please be aware that individuals have been fraudulently misrepresenting to business owners (and others) that United Capital Source, Inc. (“UCS”) can assist small businesses in receiving government grants and other forgivable business loans, when in fact those grants or loans do not exist or are not available. These individuals have ulterior motives and are engaging in the unauthorized use of the names, trademarks, domain names, and logos of UCS in an attempt to commit fraud upon unsuspecting small business owners.
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