A business line of credit provides you with access to funds to spend as your company needs. You are able to withdraw exactly according to your business need and will only pay interest on the funds that you use. You are never obligated to withdraw the entire credit line amount.
Flexibility of use
Pay interest only on what you spend
Offers control of funds
Helps build credit
Collateral may be required
Can have costly fees
May have to re-submit paperwork to reuse funds
A small business line of credit functions more similarly to a credit card than a small business loan, providing more flexibility than any other funding type. The benefits of a business line of credit make it a preferred funding option for many business owners, offering you the chance to:
Small business lines of credit provide businesses with an approved credit limit that you are free to borrow from, on your own terms, on a rotation basis.
A line of credit is not limited to one specific purchase or purpose. Spend the funds and reuse them on an as-needed basis, making payment on the used portion of the credit line.
Make your payments on time and raise your score over the lifetime of the small business line of credit
While a small business line of credit and a business credit card may seem similar, there are three distinct differences between the two.
A line of credit is able to provide you with up to $150,000, while credit cards can only provide limits of just over $50,000. While it's possible to receive a cash advance from your business credit card, they are typically only used for credit purchases. With a line of credit, you can deposit your funds directly into your bank account without incurring additional fees.
While a business credit line is quite flexible, business credit cards provide more flexibility when it comes to repayment. Aside from minimum monthly payments, there is no set repayment schedule for a credit card. Small business lines of credit, on the other hand, come with a set repayment schedule. Borrowers will pay either daily, weekly, or monthly installments over the course of 6-12 months.
Business credit cards usually offer attractive rewards programs that lines of credit cannot. These card perks do, however, typically come with an annual fee which recoups the cost of these benefits for the provider. While small business lines of credit don't feature any rewards programs, they do come without any annual fees.
One of the most important questions you should ask is if the business LOC is secured or unsecured. Let’s compare and contrast each line of credit.
| Secure Lines of Credit | Unsecured Lines of Credit |
|
No purchase restrictions |
|
|
No interest charged on unused credit |
|
|
No set monthly payments |
|
|
Personal or business collateral is required to secure the funding. |
Collateral is not required to secure funding. |
Collateral can be seized in the event the borrower defaults on funding |
In the event the borrower defaults on funding, your business could be sued by your lender, result in a foreclosure on your assets |
Low risk to lenders |
Higher risk to lenders |
Provides higher credit limits, lower interest rates |
Provides reduced credit limits,higher interest rates |
If you are looking for a substantially high credit limit, you will have better luck being approved for your desired amount with a secured line of credit, even if you don’t have a high credit score
If you need help deciding on the best funding option for your business, feel free to contact Fast Capital 360 to speak with a Business Advisor.
After you decide whether you would like to proceed with a traditional bank or online lender, you can get started with the business line of credit application process.
Your application could include more or fewer documents, depending on the lender that you choose.
While we have come to expect a comprehensive application from traditional banks, online lenders usually offer a more streamlined process which is often preferred by business owners looking to move quickly.
This is because banks typically offer longer-term options, and they want to fully vet borrowers before offering a business line of credit approval.
Your line of credit can be used for a variety of purposes, as long as it is business-related. Let’s review a few of the most common uses:
Business owners sometimes turn to a business line of credit to help cover inventory expenses during a slow season, or just to stock up on supplies in case of an emergency.
For business owners that need to purchase a new piece of equipment or are even looking to upgrade, a business line of credit can be used to finance that cost.
If a company is suffering from a slump, a business line of credit can help cover everyday operational costs to help ease that financial burden.
With a line of credit, you are free to use any amount within your limit however you see fit for your business. And, you won’t ever need to worry about having to pay interest on the funds you don’t use.
Perhaps the biggest reason for the small business line of credit popularity is the ability to spend funds, pay it back, and then reuse as needed. This differs from a traditional loan which is disbursed all at once and requires payment over an agreed amount of time.
However, it’s because of that flexibility that can make a small business line of credit difficult to qualify for, especially for startups with less than one year in operation and a low business revenue.
Depending on the lender, you might also have to re-submit documents and paperwork whenever you want to make a withdrawal from the funds.
If you need short-term funding for an immediate expense or are even looking to prepare for financial emergencies, a small business line of credit could be a good option for you and can even help build your credit along the way.
