6 Kinds of Line of Credit Loans That Could Help Grow Your Business

Ben Rashkovich

Ben Rashkovich

Content Strategy Manager at Fundera
Ben is the resident wordsmith and grammar guru at Fundera. He makes sure their top-notch content stays accessible, interesting, and useful for small business owners. Previously, Ben wrote for the Columbia Spectator and eBay's curatorial team.
Ben Rashkovich

They say diversity is the spice of life… And boy, taking out a business loan can be pretty spicy. There are plenty of reasons why you might want to get a loan for your business from a bank or alternative lender—ranging from making payroll next week to expanding your operations with another location, and everything in between—so it’s fitting that there are more than a few kinds of loans to pick from.

There’s no one-size-fits-all approach to funding your business’s growth, but if you’re looking for flexibility, then line of credit loans are the way to go. Let’s discuss why—and what sorts of line of credit loans you have to choose from.

Line of Credit Loans: The General Idea

Generally speaking, line of credit loans are revolving credit: you can keep going around and around, drawing out cash and paying it back, so long as you prove yourself to be a trustworthy borrower to your lender.

Take your typical term loan. You get a lump sum in your bank account, all at once, and you’ll have a set amount of months or years to pay it off. Ideally you’ll want to invest that capital into business opportunities that will pay back more than what they cost, so you’re making money on top of the loan repayment and interest. It wouldn’t be smart to let that money lie unused, though, because then you’ll wind up paying it all back—and then some.

Line of credit loans, on the other hand, are okay with waiting around for you. They’re the loyal German Shepherds on guard until the moment you need them. Whether for a major upgrade to your store, inventory, or marketing plan, or for more standard operational costs like rent, payroll, or maintenance, you can use those line of credit loans for nearly anything you want. And because you only pay on what you take out, you don’t have to worry about investing every cent into a highly profitable venture. Line of credit loans give you a bit of financial freedom that you’d be hard-pressed to find otherwise.

With that said, you’ll want to be careful tying up your line of credit loan cash in long-term investments—you risk effectively lowering that maximum withdrawal amount and losing out on the fast flexibility of the line of credit. Big investments are generally better served by term loans instead, so you might actually want to take out both kinds of credit if you’re looking to grow.

Here’s a summary of the general perks of line of credit loans:

  • Instant access. Need to make a quick repair or deal with an emergency? Don’t have the time to go through a tedious loan application? Your line of credit loan is there.
  • Flexible spending. Take out as much or as little as you need—and only pay on that amount. This is great if you own a seasonal business, since you might not know exactly how big of a loan you’ll want or whether you can make enough in the off-season to pay the whole thing back.
  • Sometimes unsecured. Most line of credit loans under $100,000 don’t require collateral, so you won’t have to tie up anything to your business’s financials.
  • No-strings-attached backup. Rest easy knowing that you have an easy, quick way to get capital—if and when you need it. And if not, then there’s nothing wrong with being prepared. A back pocket line of credit loan could easily save your business if the wrong circumstances came around.  

Line of Credit Loans: Small, Medium & Large

It’s a bit of a paradox to say “short-term line of credit,” because by definition, a line of credit can last forever. That’s the whole revolving part of the idea—when you pay down what you owe, you have access to the full amount of cash again.

But that’s what we decided to do in our last quarterly report. We’ll explain why in the next few sections, which break down short-term, medium-term, and long-term (or bank-level) line of credit loans.

1. Short-Term Line of Credit Loans

Line of credit loans don’t have terms the same way that, well, term loans do. A short-term loan might be “short-term” because it has a 3 to 18 month payback period—but as we discussed, you only pay on what you take out for line of credit loans, so how can one be “short-term?”

What we really mean by a short-term line of credit loan is a line of credit loan analogous to a short-term loan, at least when we’re talking about factors like loan amount, interest rate and APR, credit score requirements, revenue requirements, and so on. The qualification criteria capture pretty much the same groups of small business owners, in other words.

line-of-credit-loans-2

As you can see, short-term loans and short-term line of credit loans are used by small business owners of lower credit scores and annual revenues, on average, and tend to have higher APRs. However, they’re often much easier to qualify for and faster to receive. As always, speed is the trade-off for cost.

Short-term line of credit lenders include OnDeck and Kabbage.

2. Medium-Term Line of Credit Loans

Similarly, medium-term line of credit loans match up with your typical medium-term loans. Compared to short-term line of credit loans, with medium-term line of credit loans you can:

  • Draw more money, because of the higher maximum amounts. The differences depend on your unique small business’s financials and on the lender you’re working with, but they can be substantial.
  • Pay less. (At least relatively.) Medium-term line of credit loans have lower APRs, so you’ll be paying less per-dollar.
  • Solve bigger problems. You can cover more inventory costs, make more repairs, handle more payroll and bills, bridge wider gaps between payments and expenses… You get the picture. The order-of-magnitude gap between short-term and medium-term line of credit loans makes them pretty different products, even though they function the same ways.

As you might guess, only borrowers with higher credit scores and annual revenue tend to qualify for medium-term line of credit loans. Everything takes longer—receiving the money, getting approved, and gathering the paperwork to apply in the first place—because lenders want to be that much surer about who they’re handing cash out to.

You can think of short-term and medium-term line of credit loan options in relation to the age of your business, too. With a short-term line of credit loan, younger businesses can have that financial safety cushion that comes with flexible revolving credit. With a medium-term line of credit loan, though, more time-tested and experienced business owners can graduate into using a line of credit for bigger projects. These line of credit loan types scale with the size of your business—there’s no best or worst product. There’s just right or wrong for your business, right now.

Lending Club and The Credit Junction are two alternative lenders that offer medium-term line of credit loans.

3. Bank Line of Credit Loans

While alternative lenders have the ability to serve younger or lower credit borrowers, banks remain the most financially sensible—if you can qualify. With the lowest interest rates and highest loan amounts around, banks offer the most affordable line of credit loans.

The caveat? As always, small business loans from banks are incredibly difficult to qualify for: 4 out of every 5 small business owners get turned away. Plus, banks typically take much longer to underwrite and process applications—so even if you are eligible for bank-level line of credit loans, you might not be able to wait long enough to get one.

This just goes to show how, even with a line of credit loan, you shouldn’t wait to apply for a loan until the moment you really need it. In fact, this holds true especially with a line of credit loan, since there’s no real downside to taking one out early on. Although some lenders impose maintenance fees if you don’t withdraw any cash, that’s easily avoided and worth the risk—keeping a substantial margin of safety for your small business’s finances will help you sleep at night. One way to think of it is as catch-all insurance, protecting against anything from a botched batch of inventory to predictable seasonal downturn.

Line of Credit Loans: Other Types

Those are the typical kinds of line of credit loans: from big to small. Makes sense. But we all know how varied the needs of small business owners can be—and how creative lenders can get to sync up with those needs.

These alternative line of credit loan structures might not demand the same kinds of high credit scores as, say, medium-term line of credit loans, but they can potentially offer the same rates and amounts. That’s because, for two of the three below, they’re backed by some collateral. For these products, lenders will appraise your business with a focus on your accounts receivable or your equipment purchases, instead of completely holistically as usual—so they might be a bit more forgiving of lower credit or revenue, since they’ll have some claims on your assets.

Regardless of their eligibility standards, the lenders who offer equipment-backed and invoice-backed line of credit loans are more useful to certain types of businesses than others. It all depends on how your business works, so take a look and consider whether you might be able to benefit from these less typical products.

4. Equipment-Backed Line of Credit Loans

For asset-based lenders, the future can be as important as the past. Most lenders look at the history of your business and your borrowing habits to determine whether you’ll be a good investment—but that’s because they rarely have collateral to put up against your loan.

Asset-based lenders, on the other hand, are more concerned with your upcoming prospects. Since the money you’re borrowing from them is tied to a specific bit of collateral, they’re betting on that new piece of equipment helping you repay your debts. A lender who offers equipment-backed line of credit loans will put a lien on the asset that’s collateralizing the loan—or, in other words, they’ll claim ownership over the equipment if you can’t pay them back.

These types of line of credit loans also come in the inventory-backed line of credit loan variety, which is especially helpful if your cash gets all tied up in recurring inventory purchases. Dealstruck, for example, has an Inventory Line of Credit meant especially to finance inventory cycles, so that the business owner can focus on paying operational costs in the moment.

As always, you’ll want to borrow money only for the right investments. If you take out a loan to make payroll, you’ll wind up spending the cost of payroll plus the loan’s interest—without any returns. But if you take out a loan to pay for a bigger coffee machine, for example, the hope is that all that additional coffee will cover the costs of the loan (and then some!). The point is to spend smart.

The good thing about equipment-backed or inventory-backed line of credit loans? You’re necessarily financing those investments that can contribute to your bottom line, freeing up your cash flow for everything else you need to spend money on. (Unless you’re spending money on the wrong equipment or inventory, that is!)

5. Invoice-Backed Line of Credit Loans

Similarly, an invoice-backed line of credit loan—called an asset-based line of credit by Dealstruck—uses your accounts receivable as collateral to establish a line of credit loan.

The general principle behind invoice financing (or “accounts receivable financing”) is that waiting for a customer to pay up often causes gaps and slowdowns in cash flow. If you need to wait for Ron to complete your invoice in order to pay your employees, but Ron is running late on his payment, then you’re left out in the cold… Unless you can make a bridge by financing your accounts receivable. You get capital when you need it, and don’t have to suffer the costs incurred by your customers’ tardiness.

In Dealstruck’s case, you submit your eligible accounts receivable and A/R aging, which Dealstruck then uses to figure out your line of credit maximum—usually about 80-85% of your invoices. Payments on those invoices go directly to a bank account managed by the lender and pay off your line of credit debts—and if you don’t have any funds drawn, then they’re redirected to your business.

Think of it this way: invoice-backed line of credit loans effectively pay off most of your invoices right away, freeing you to use that capital however and whenever you want. The interest you pay on your withdrawals is just the cost of always having cash on-hand instead of waiting for it to shuffle in unpredictably.

And the advantage of going the invoice financing route with a line of credit loan, rather than a term loan, is that your credit maximum can grow based on your weekly accounts receivable updates. The more invoices you’re expecting, the more money you can borrow. An invoice-backed line of credit loan can drastically change how you manage your cash flow and business debts.

6. Business Credit Cards as Line of Credit Loans

Take a line of credit loan, add some plastic, and you’ve got yourself a credit card. You might not think about credit cards that way, but it’s essentially what they are: portable, physical lines of credit.

If you’ve invested in building up your business credit, then you’ll definitely have a business credit card—which you can use whenever you need capital with speed, flexibility, and no collateral requirements. Plus, plenty of business credit cards come with introductory 0% APRs! And that’s not even mentioning the points and rewards systems offered by credit card issuers.

Let’s break down these advantages a little more:

1. Speed

With a business credit card, you don’t need to wait for approval in order to make a purchase. Even with line of credit loans, you might need to show additional documents if you’re drawing more on the line—but credit cards don’t have those kinds of restrictions. (That said, your credit maximum will likely be higher on line of credit loans than on credit cards.)

2. Flexibility

Though you might need to whip out that credit card for business-related purchases only, there aren’t any restrictions on what you can pay for. Inventory? Equipment? Services? No need to think twice.

3. No collateral requirements

Unlike some term loans, as well as invoice-backed and equipment-backed line of credit loans, credit cards don’t get tied up with your collateral. That’s not necessarily an advantage—as we discussed earlier, collateral can actually help you get bigger or better loans sometimes—but it’s definitely something to think about.

4. 0% introductory APR

Three, six, even twelve months without interest payments—so long as you pay on time. It’s just plain fun to imagine what you can do for your business with that freedom to spend. As long as you’re cautious and thoughtful with your purchasing habits, this popular credit card deal could go a long way to help you out.

5. Points and rewards

Reward rates, free flights and flying perks, complimentary hotel stays, discounted meals, no foreign transaction fees… These are just some of the more common rewards, points, and perks that a credit card might come with. While you shouldn’t use a credit card exclusively for its rewards system, that’s still something to take into real consideration.

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Now that you’re the master of line of credit loans, you’re on the way to making the smartest choices for financing and growing your business. It might be that a term loan works best for your situation, or a line of credit loan makes the most sense—or both! Either way, you’re more educated about your options, and that’s always a good thing.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Ben Rashkovich

Ben Rashkovich

Content Strategy Manager at Fundera
Ben is the resident wordsmith and grammar guru at Fundera. He makes sure their top-notch content stays accessible, interesting, and useful for small business owners. Previously, Ben wrote for the Columbia Spectator and eBay's curatorial team.
Ben Rashkovich

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