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Small business lines of credit can help you meet your funding needs as they change over time. They can be especially helpful for business owners who know they'll need funding at various points in the future but aren't sure when. It's a flexible funding solution that's best suited to short-term business needs for items like supplies or payroll.
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What is a business or commercial line of credit used for?
Small business lines of credit are commonly used to pay for short-term business needs like payroll costs, buying new inventory or dealing with temporary business hardships. They're not used for long-term business needs, like purchasing expensive equipment or buying real estate.
How a business line of credit works
A business line of credit works a lot like a credit card. You can borrow money up to a preset credit limit. You’ll pay interest only on what you borrow, and when you repay it, the line replenishes itself for you to use again. Business lines of credit can be unsecured or secured, which means you’d have to provide collateral to guarantee the line.
Here are some of the pros and cons of using a business line of credit:
How to get a business line of credit
The process to qualify for a business line of credit will depend on the requirements of individual lenders, but here are some common criteria to expect:
- Personal credit score above 600
- Strong cash reserves or strong cash flows
- Age of business and length of time your business has been profitable
- Well-constructed business plan
You can get a business line of credit from traditional banks or online lenders. Banks will often give the most competitive interest rates but have longer application processing times and stricter requirements. If you can't qualify with a bank, consider online lenders, which often have more lenient requirements and faster funding times but typically charge much higher rates.
What to consider when choosing a business line of credit
The four major differentiators between lenders and products are the following:
- Minimum requirements: Many lenders require a minimum $100,000 in annual revenue and for a business to have been in operation for at least a year. Looking at the different requirements across different lenders is the easiest and quickest way to determine what products you'll want to consider, as well as what not to.
- Credit line details: Most products don't require a regular draw, but some might require it just to keep your rates locked. Some may contain usage fees, which will vary depending on the lender. Lines of credit may charge origination, maintenance or annual fees, though these might be waived if you withdraw a specified amount within a certain amount of time. Many of the lines of credit geared toward startups don't have any maintenance or origination fees.
- Application process: After submitting an application to an online lender, you can expect a decision within a business day or two, and your funds may be available within three business days. If you go with a traditional lender, it might take weeks to receive an approval decision and funding.
- Repayment terms: Many credit lines require weekly payments, but there are others with monthly payments or more flexible plans, if that's how your business operates.
I know what I want to apply for. Now what?
Once you've identified the lender and product you want to use, take a look at the lender's website. Most lenders will offer online applications that can be easily filled out within minutes. For some lenders, you can schedule an appointment at a physical branch location to learn more about applying for a business line of credit.
Be aware of any promotions that incentivize you to make draws early on in the term — for example, some lenders will waive certain fees if you draw a certain amount within a number of weeks after your line has been opened.
What should I do once my business line of credit becomes active?
- Pay attention to what you use your line of credit for. You should use your line of credit for expenses that will generate a quick return. In a perfect world, you'd pay off your balance immediately after you use your credit to avoid fees. Usually, the bulk of fees will come from usage or interest fees on the credit that you use, so you shouldn't feel pressured to use it.
- Understand your repayment plan. Lines of credit typically have repayment schedules that are more regular (typically weekly) than most businesses may be used to.
- Make on-time payments. If you want to continue operating with your line of credit, good standing with your lender is crucial. Don't be late on payments — otherwise, you may face late fees and increased interest rates or the lender may liquidate your collateral to recoup its loss. On the flip side, if you always make your payments on time and use your credit enough to show that you're a reliable customer, you may get your credit line increased and fees reduced.
Business credit cards vs. business lines of credit vs. business loans
Business lines of credit are just one option of funding for your business. Here’s more how a business line of credit compares to a business term loan and business credit cards.
Business credit cards vs. business line of credit
Business credit cards are best suited for frequent everyday business expenses. Credit cards are often structured with lower credit limits and high fees than business lines of credit. However, credit cards are also the most liquid form of credit a business can use, making them ideal for daily expenditures. For example, if you're looking for a financing option to buy office supplies on a regular basis or take out clients week to week, credit cards are the right option. Business lines of credit are best used for larger ongoing expenses like marketing campaigns and other long-term projects or bridging cash flow gaps.
Business loans vs. business line of credit
Business loans of all kinds are typically best for larger and infrequent business expenses. The major difference with business term loans from credit cards and lines of credit is that your business is issued as a lump sum upfront as a source of financing. If you apply for a loan, you're going to have to pay back your principal amount with interest and fees attached. If you want to buy a new office space or spend money on a large, one-time expense that you feel will generate enough revenue that exceeds the debt, a term loan is a good option. Loans aren't revolving, either, so there is a finite limit to how much you can finance before needing to apply for another term loan.