Table of Contents
- Business Lines of Credit: A Crash Course
- Why Choose a Business Line of Credit?
- Secured vs. Unsecured Lines of Credit
- How to Apply for a Business Line of Credit
- Where to Find the Best Online Business Lines of Credit
- Getting the Best Line of Credit for Your Business
Lines of credit offer several key benefits over loans and other debt financing options, making them an attractive option for business owners and entrepreneurs. Best of all, they’re easier to obtain than you might assume.
Successful business owners are experts when it comes to strategizing. They plan, calculate their next move and execute operating procedures to a tee.
However, every business owner knows that sometimes expert planning isn’t an option—there are simply too many unexpected costs, surprise expenses, opportunities and contingencies that can throw a wrench in your plan.
Business owners need to be as flexible as they are strategic. This is where business lines of credit offer a helping hand. When you need to borrow capital to cover unforeseen costs, tide you through a cash crunch or jump on an opportunity, business lines of credit can be tapped into on demand.
Interested in learning more about business lines of credit and how to get approved for one? Read on.
Business Lines of Credit: A Crash Course
You can think of a business line of credit as a “revolving” pool of capital that can be drawn from up to a predetermined credit limit. Credit lines operate much the same way as a credit card, in that they can be tapped from when necessary, paid off and then borrowed from again. And, like credit cards, you only have to pay interest on the portion that you borrow.
Credit lines are among the best options on the market for business owners that regularly find themselves having to pay off unexpected expenses. Unlike a term loan, the amount that you repay from the credit line is then made available to you again for future use.
It resembles a “revolving door” of sorts—you borrow, repay the borrowed portion with interest and can continue re-borrowing the capital whenever you need.
Business Line of Credit vs. Term Loans
Loans suffer from rigidity, in that they cannot be borrowed from again and again. Instead, loans offer a lump sum payment, the entirety of which is repaid with interest in regular installments. In certain agreements, you must pay a prepayment penalty if you pay off a loan in full before its amortization period.
A bank, credit union or alternative lender commonly issues a term loan to cover the cost of a fixed, one-time purchase, such as real estate or a business expansion project. Term loans make the most sense in scenarios where you need to use the entire borrowed amount right away.
After you’ve taken out a loan and repaid it, you need to apply all over again for additional funds. As you might imagine, this is a time-intensive method of borrowing compared to a business line of credit.
With a credit line, business owners don’t have to worry about continually reapplying, paying origination fees and waiting through the vetting process every year or two.
For short-term needs, credit lines are a sensible solution. Unlike term loans, they can be withdrawn from and repaid on an as-needed basis, can quickly improve your business credit score and can save you the time and hassle of having to reapply.
Why Choose a Business Line of Credit?
As we touched on earlier, there are many advantages to choosing a credit line over a term loan, invoice financing or other financing methods.
Business lines of credit are appealing to entrepreneurs and business owners in unpredictable, fast-paced business environments. Here’s a quick summary of their key benefits:
- They can be repaid and borrowed again
- They can be a valuable buffer to cover emergency expenses or a business opportunity
- They can help manage seasonal and industry-specific cash flow fluctuations
- They have lower interest rates than credit cards
- They offer a great middle ground between term loans and credit cards
You can think of business lines of credit as a high-capital alternative to a credit card, or like having a loan “on tap” that can be drawn from whenever the need arises.
Opening a business credit line is often the preferred choice among business owners that want a streamlined, no-nonsense borrowing solution.
Cash Flow Management
Superior cash flow management is one of the main selling points of business credit lines. If you work in a seasonal industry like tourism, hospitality, lawn care, tax preparation or snow removal, you probably understand all too well the weight that seasonal slow-downs can put on your bottom line.
Fortunately, business lines of credit can help smooth out your cash flow during predictable economic downturns. For instance, a line of credit can help you purchase inventory when you need it most, instead of buying inventory items way ahead of time and having to wait until business picks up again.
Lines of Credit and Interest Rates
Although lines of credit won’t offer you the stellar perks and marketing incentives that credit cards will, such as air miles, warranty extensions, hotel packages and car rental discounts, they do come with significantly lower annual percentage rates (APRs). While business credit cards have APRs around the 20 percent mark, lines of credit usually hover just above the prime rate.
Credit lines and credit cards aren’t mutually exclusive. Ideally, you will apply for at least one business credit card in addition to a credit line. This way, you can benefit from convenience as well as the cost-savings associated with credit lines for larger purchases.
Since credit lines tend to have higher credit limits, they are usually the only option of the two when it comes to making five or six-figure expenses.
Potential applicants should also note that the interest paid is tax deductible. In other words, you can write off the interest you pay on your business line of credit as a legitimate business expense, which can save you money every year on your tax returns.
Speak with your financial advisor about how you can reap these income tax savings.
Secured vs. Unsecured Lines of Credit
There are two types of business lines of credit: secured and unsecured. Below, we’ll provide a quick overview of these two methods of lending and which one you’re better off applying for.
Secured Credit Lines
Secured lines of credit require borrowers to collateralize the credit line. In other words, they require the applicant to pledge high-value assets to secure the loan against the risk of default. After all, unless the credit line is secured with collateral, the lender accepts a high degree of risk if you fail to repay the debt.
When loans and credit lines are secured, the collateral mitigates the inherent risk of lending to small businesses. Collateral is any asset that the lender can assume ownership of and liquidate to pay off the balance of the loan or credit line.
You can use any of the following (non-exhaustive) list of assets to secure borrowed cash or credit:
- Real estate
- Personal or company vehicles
- Home equity
- Accounts receivable (e.g., unpaid invoices)
In most cases, lenders will ask for short-term assets such as outstanding invoices or inventory to secure a business line of credit.
Unsecured Credit Lines
Unsecured credit lines are lines of credit that haven’t been collateralized. That is, they offer no protection to lenders in case the borrower defaults on the loan or fails to make repayments. To offset the risk of unsecured lending, creditors reduce credit limits and charge higher interest rates.
The benefit of unsecured lending is that the approval process tends to be much shorter than that of a secured loan, and requires only a fraction of the necessary paperwork. Conversely, the main drawback to going with an unsecured credit line is that they typically have a higher price tag thanks to their steeper APRs.
How to Apply for a Business Line of Credit
Now that we know the basics of business credit lines, let’s walk through the standard application process for a business line of credit. The issue here is that there is no “standard” type of credit line—there are long-term lines, short-term lines, secured and unsecured lines and credit lines with high or low interest rates.
For simplicity’s sake, we’ll assume that we’re applying for a secured medium-term (i.e., <5 years) credit line with a $100,000 limit. Many small companies with two years or longer in business find that this is a common type of credit line offered to them, and it is currently offered by alternative lenders and banks.
Starting Your Search
The first thing you should do when applying for a business line of credit is to pause and consider whether you’re making the right choice. After all, there are many types of financing options that may or may not suit your business’s unique needs and challenges. Some of the most common methods of financing include:
- Term loans
- SBA loans
- Short-term loans
- Invoice financing
- Equipment financing
The truth is that no lending option is inherently better than any other. Instead, your decision should hinge on whether a line of credit best satisfies your needs. For instance, if you’re unsure as to how much capital you need to access and you intend to spend the borrowed capital over a sustained period (not all at once), then a line of credit offers the flexibility that you need compared to a term loan.
Checking Your Credit Score
Your personal credit score is one of the few aspects of your application that can make or break your chances of success. Ideally, you will apply for a low-interest line of credit with a strong credit score of 650 or higher (although some lenders will consider applications from applicants with bad credit). According to the major credit reporting agencies, FICO® scores are used by 90 percent of lenders and correspond to the following categories:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
As a rule, you should expect a higher APR on your loan or credit line if you have a FICO® score of 600 or less. Typically, online lenders are your best option if you’re applying with bad credit or haven’t yet established a business credit score.
Gathering Your Documents
Once you’re ready to apply, you need to collect the various documents and pieces of identification that the lender will ask for on the application. Although the online business loan application process is relatively streamlined compared to banks or traditional lenders, there will still be several key pieces of information that the lender will want, including:
- One form of a government-issued ID
- Tax returns
- Bank statements
- Cash flow statements (i.e., balance sheet and P&L statements)
- Articles of Incorporation
Though not all of the above documents will be requested by the lender you choose especially if you decide to go with an alternative online lender), it’s a good idea to cover all your bases and maximize the number of documents you collect during the pre-application phase.
Filing the Application
You’ve settled on the lender, and you’ve gathered all the documents you need to get started submitting your application. At this point, you’re just about finished. All you have to do is go to the website of the lender and follow their on-site application process.
If, however, you’ve decided to apply for your business line of credit through a bank or credit union, you need to schedule an appointment with their in-house loan officer.
Applying online usually takes an hour or less from start to finish. Once the application is complete, you will be notified either via email or a phone call that the lender has received your file and that it is under review. From there, an algorithm will vet your application, check your qualifications and send your file through an underwriting process.
After everything is said and done, you should receive notice regarding your application’s approval within a day. Not surprisingly, if you are applying through a bank or are filing for a secured loan, you can expect the turnaround time to be a bit longer than usual (typically, to the tune of a few additional business days).
Where to Find the Best Online Business Lines of Credit
With all this talk about the benefits of online business lending, you may be wondering where you can find the best online business lines of credit. We’ve done some homework to find some of the top lenders in 2019 that you can apply through to get fast and affordable lines of credit for your business.
Boasting a three-minute credit decision, FundBox offers some of the fastest business lines of credit on the market. The catch, however, is that to qualify for their loans or credit lines you need to use compatible accounting or invoicing software that can sync with their in-house system. FundBox specializes in invoice-backed lines of credit that are secured by the borrower’s accounts receivable.
On the upside, applicants can qualify for a FundBox line of credit after only being in business for three months. Plus, FundBox doesn’t have a mandatory minimum FICO® score for applicants. They will, however, pull your credit during the underwriting process.
While certainly useful for small businesses that are just getting their start, FundBox isn’t the right choice for everyone. If you’re a more established business and want to find lower rates, there are funding options on the market that are more affordable than FundBox.
For short-term working capital, FundBox is an excellent solution if your credit score is lacking.
- APRs: 4.66 to 8.99%
- Credit Limit: Up to $100,000
- Required Time in Business: None
- Required Annual Revenues: None
- Required Credit Score: None
More established small businesses should consider choosing BlueVine for their next business line of credit. With rates starting as low as 4.8% and credit limits up to $250,000, BlueVine is affordable and competitive in their pricing structure.
BlueVine’s online application process is intuitive and only takes about 20 minutes to finish. From there, it only takes minutes to get approved and you can request to have funds withdrawn within hours directly from the BlueVine dashboard.
From a UX perspective, BlueVine’s interface looks just like PayPal’s, and shares in its simplicity and user-friendliness.
We suggest checking out BlueVine if you’re a small business owner that is looking for consistent cash flow and an easy method of building credit. Since BlueVine’s credit lines can be repaid in fixed weekly or monthly installments, it’s easy to “set it and forget it” and find that your credit score has improved significantly in only six months.
- APRs: 4.8%+
- Credit Limit: Up to $250,000
- Required Time in Business: 3 Months
- Required Annual Revenues: $100,000
- Required Credit Score: 600+
An OnDeck Line of Credit is one of the safest and most reliant debt financing options for small and medium-sized enterprises in 2019. With over $10 billion in loans issued to small businesses globally, and a 9.8 score on TrustPilot and an A+ rating from the Better Business Bureau (BBB), you can rest assured that OnDeck is the real deal.
The downside to OnDeck is that their APRs start at 13.99%, making them one of the costliest options on the market. You get what you pay for with OnDeck, because their online loan application system will set you up with an in-house Loan Specialist that can help guide you through the process during normal business hours through email or a phone call.
Expert customer service is the main selling point of OnDeck, which has advisors that specialize in over 700 industries and niches. If you’re new to the world of online business debt financing, you may want to choose OnDeck for its simple online application process and available staff that can guide you from end-to-end.
- APRs: 13.99%
- Credit Limit: Up to $100,000
- Required Time in Business: 12 Months
- Required Annual Revenues: $100,000
- Required Credit Score: 500+
Since launching only five years ago, StreetShares has quickly earned a name for itself as one of the best online sources for affordable business lines of credit.
The standout feature of this lender is that they will consider applicants with rock-bottom revenues, starting as low as $25,000. StreetShares is among the most accessible alternative lenders for business lines of credit.
Unfortunately, you will have to wait a while before you hear back about the status of your application once it’s filed. It’s not uncommon for StreetShares applications to take up to a week before the vetting and underwriting processes are finished.
We recommend time-strapped business owners look elsewhere for opening their line of credit. However, they have the edge on some lenders by offering an extended 36-month repayment length.
- APRs: 9%+
- Credit Limit: Up to $250,000
- Required Time in Business: 12 Months
- Required Annual Revenues: $25,000
- Required Credit Score: 620+
Online Lending Marketplaces
A good place to start your search for a business line of credit is a loan marketplace. A business loan marketplace is a service that can connect you with multiple lenders after filling out a basic application. This reduces the amount of time it takes to find a lender that meets your business’s needs and whose eligibility requirements you can satisfy. On top of that, many offer resources to help business owners navigate the application process.
Getting the Best Line of Credit for Your Business
Business lines of credit make for a flexible and accessible source of debt financing for startups and burgeoning enterprises alike. However, if you’re strapped for time and can’t wait around while banks and credit unions process your application, we suggest applying for an online business line of credit.
This way, you can get the capital you need without having to worry about the status of your application. Instead, you can focus on doing what you do best—running your business.