A business line of credit is one of the most flexible funding solutions you can have for your business. With or without cash flow issues, most companies keep a business line of credit for expansion opportunities or unexpected growth.
With this financing option, small businesses have consistent access to cash to meet business expenses. You can apply for a business line of credit through most banks, credit unions, and online lenders.
Before applying for a business line of credit, spare a few minutes to go through this post. This article will explore the types of business lines of credit and how they can benefit your business.
What is a business line of credit?
A business line of credit is a revolving loan that gives business owners access to a fixed amount of capital. It works like a credit card. There are two types of business lines of credit; secured and unsecured. These two options vary in fees, requirements, and interest rates.
A secured business line of credit
With a secured business line of credit, you can use various forms of collateral to access cash. If a business fails to repay the loan, the lender will sell off the collateral to reclaim the money. It is simple to apply for a secured business line of credit because it is backed by an asset.
An unsecured business line of credit
You don’t need any form of collateral to apply for an unsecured line of credit. Most lenders offer an unsecured business line of credit to small businesses. However, the requirements and conditions are much stricter due to the risks involved.
Who can benefit from a business line of credit?
Any business can benefit from a business line of credit. However, small businesses are the ones who need (and benefit) the most. This is because they require more capital to expand their businesses and meet expenses.
Additionally, seasonal businesses can benefit from a business line of credit, especially during the low season.
If you’re a business owner, you can benefit from a business line of credit if;
Your business experiences seasonal fluctuations
For some businesses, their sales depend on seasons. For instance, they might have more sales during winter or holiday seasons and sell less during summer. A business line of credit will come in handy in times of low sales.
You’re looking for extra cash flow
You might be getting revenue from your business, but just enough to meet all the costs and operating expenses but not enough to fund expansion. Or perhaps, your business might have a cash flow problem. A business line of credit can act as a reliable source of extra cash flow.
You have short-term needs
If you’re running out of stock, and you can’t afford to replenish it, a business line of credit can come to your aid. Most small businesses use business lines of credit to purchase inventory and equipment or pay unexpected costs.
You offer products/services on credit
Some businesses sell products or services on credit and receive payments at a later date. These companies can run out of funds if the clients take longer than the agreed term to pay. A business line of credit can help you to keep your business running.
Some businesses and industries that benefit from small business lines of credit include;
- Construction companies. Contractors, electricians, specialty tradespeople, plumbers, and more.
- Medical practices. Psychiatrists, surgeons, veterinarians, and dermatologists.
- Salons & spas, convenience stores, specialty stores, clothing stores, and more.
- Restaurant and hospitality industry. Fine dining, fast food, casual dining, pubs, food trucks, bed & breakfasts, souvenir shops, and more.
- Business services. Maintenance, advertising, computer programming, equipment rental, and more.
Expert tip: Apply for a business line of credit when your business still has a healthy cash flow and revenue stream. Don’t wait until you’re in a cash flow crunch. Remember the terms and eligibility of a business line of credit depending on your business’s financial position and cash flow.
How to qualify for a business line of credit
To qualify for a business line of credit, your business will need to meet specific requirements. The qualification requirements can vary depending on the financial institution or lender. Also, your qualifications will determine the maximum amount of funding and the terms. Here are some of the basic requirements for a business line of credit.
Person credit score
Just as with any type of loan, your credit score matters a lot when applying for a business line of credit. Most lenders will demand a personal credit score of not less than 500 to grant you a business line of credit.
If your personal credit score is 600+, you’ll enjoy better terms, lower interest rates, and more options. Additionally, if you’re applying for a business line of credit through banks or SBA, you’ll need a personal credit score of at least 660.
Some lenders may check your business credit score to qualify you for a small business line of credit. But what matters the most is your personal credit score.
Time in business
A business line of credit requires you to have been in business for at least six months. If you’ve been in business for more than a year or two, you’re more likely to qualify and enjoy better terms and rates.
However, this doesn’t bar new enterprises. If you’re just starting and need access to cash, you can still apply for a small business line of credit. Some lenders like the SBA, only offer financing options to small businesses. You may qualify in other categories like personal credit score/history.
Some lenders demand a minimum annual revenue of $25000-$100,000 to qualify for a business line of credit. Banks’ lines of credit have higher annual revenue demands than alternative lenders.
You’ll need to present various financial documents to verify your annual revenue and cash flow. This helps lenders evaluate and determine your ability to repay the loan. You may need to provide;
- Balanced sheets
- Bank statements
- Personal and business tax returns
- Business profit and loss statements
If you’re applying for a secured line of credit, you’ll need some form of collateral like physical inventory, real estate equity, and accounts receivable. If you fail to repay the loan as agreed, the lender claims the collateral to recoup the money (or losses).
Sometimes, you may need to sign a personal guarantee, agreeing to repay the loan if your business fails.
If your personal credit score is below the requirements, or if the other factors don’t qualify you for a business line of credit, you’ll need to provide more collateral.
Final thoughts on a business line of credit
If you’re seeking a better financing option for your business, a business line of credit might be ideal. Although all businesses can benefit from a business line of credit, small businesses need it the most. A business line of credit can either be secured or unsecured, and the difference lies in collateral.
Qualifications for business lines of credit vary depending on the lender, but most of them revolve around your business’s annual revenue, time in business, and your personal credit score. An expert funding specialist can help you apply for a business line of credit.