A business line of credit is “revolving” capital that works almost like a credit card, except you get access to cash and often lower APRs. Startups can qualify for these financing products, but it’ll be much harder. Banks have very strict requirements for startups, so most startups will have an easier time with online line of credit lenders.
Running a business certainly has its ups and downs—especially when it comes to finances. Whether you’re just starting out, sustaining or growing an established business, you might experience a surplus one month and then dip into the red the next. So, how do you manage that risk and ensure you have some financial stability to run your business effectively?
Along with a business credit card and term loans, a line of credit is definitely another option to consider. And maybe you already have—FitSmallBusiness claims that 47% of small businesses have opened a line of credit.
However, there are many misconceptions around what this product actually is. What exactly does it mean to have a business line of credit, and what are the pros and cons?
We made this comprehensive guide to help you navigate the decision of whether or not to open a business line of credit.
What it is: A business line of credit is flexible “revolving” capital that works almost like a credit card, except you get access to cash and, in some cases, lower APRs.
It’s a flexible financing product that lets you withdraw funds up to a predetermined amount—this means you can withdraw funds as you need it, as opposed to receiving the full sum of the loan all at once. A business line of credit is typically used for short-term working capital needs, such as inventory purchases, future project costs, or company payroll.
Where you find it: Banks can be a good place to look for credit lines, but a number of alternative online lenders might have quicker, easier application processes or requirements. Banks have high minimum qualifications and often require specific collateral, while online providers can be far more flexible.
To find the perfect fit and absolute best terms, you should plan to compare options between several lenders—so don’t wait until you’re desperate for capital.
What you need to provide: To obtain a business line of credit, you probably need to supply some personal and business financial information, so be prepared with income and other statements or tax returns. The maximum amount of funding available, introductory duration of the credit line, and repayment terms depend on your business’s annual revenue, credit rating, history, and other factors.
What credit lines offer: Credit lines can range from $10,000 to as high as $1,000,000, depending on your business needs and qualifications. Terms are usually annual with an interest rate based on the prime rate, plus 1% to 3%.
Interest rates vary as the market changes, of course, but many lenders let you withdraw funds—via paper check, online, check card, or other methods—for no fee or very small fees. However, you can expect to pay a modest fee to open the account once you’ve been approved. For example, you might be charged $150 for credit lines under $25,000 and $250 for larger credit lines. An annual fee is often waived for the first year, and may run $100-$150 annually thereafter. Payments are interest-only on the amount you borrow.
Now that you have an idea of how this works, how do you decide?
There you have it! Regardless of your business size or type, a credit line can be very helpful, but before you apply, make sure you understand the potential risks and downsides. But if your business is equipped to handle them, the benefits could far outweigh the risks and downsides. Of course, as the old adage goes, it takes money to make money!