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Business lines of credit function like credit cards but are structured to better suit small business owners. They offer tax advantages since you can write off interest on a business credit line, unlike with a personal credit card.
Once you qualify for a business line of credit, you’ll receive a total credit limit. You can draw as much or as little as you need from that limit in multiple installments, with no obligation to use the full amount.
You manage this online by logging into an account and transferring funds from your credit line to your business bank account.
As you repay your balance, additional funds become available for use. You only pay interest on the amount you draw, not the full credit limit. However, be aware that some lenders may charge a non-utilization fee if you don’t use the line. Always ask for clear information about any fees before signing an agreement and avoid any agreements without transparent terms.
The best business line of credit is one that fits your business and its future goals. Work with a reputable, transparent lender to ensure the financing aligns with your objectives and imposes no restrictions on your growth.
Some lenders may require additional documentation, but the above list includes the most commonly requested items.
Unlike small business loans, revolving lines of credit work by allowing you to continue accessing additional funds as you pay your balance down and require more cash. In other words, it is a type of loan in which the user can borrow up to their credit again once the debt is repaid.
Some business lines of credit are revolving, while others aren’t. When you discuss the terms of your agreement, be sure to ask questions and confirm whether or not your line of credit is revolving. Revolving lines of credit are the fastest and easiest way to access additional cash as your business grows. Once you pay down part of the balance, you can draw more cash without reapplying. It’s simple, fast, and easy, and your working capital won’t be limited to your checking account.
For example, say you qualify for a $100,000 line of credit. You borrow the full $100,000 and use the cash to grow your business. You then pay down $50,000 using the revenue you generate, putting both your balance and credit limit at $50,000. With $50,000 paid down, you now have the option to borrow an additional $50,000. There’s no set end date, either. As long as you keep your credit line active or continue drawing and paying it down, you can utilize a LOC for months or even years. If you’re not actively using it, though, your small business line of credit may expire.
A top business line of credit option is one that has exactly what you need. If you aren’t satisfied with the first offer, don’t worry – there’s always a better deal out there.
A business line of credit can be a powerful tool in your back pocket. The flexibility allows you to draw funds whenever you need them and stay one step ahead of the latest challenge in your business – a priceless opportunity for any entrepreneur. Here are a few of the many benefits of leveraging a business line of credit in your operation:
A business line of credit for new businesses can change the way they grow. With flexible access to capital, you can build out necessary areas of your business without jeopardizing cash flow.
Term loans, SBA loans, and other traditional financing products provide you with a set amount of money that you must repay throughout the term outlined by your lender. If you wind up needing more than you originally anticipated, you’ll have to take out an additional loan on top of your previous financing, which can quickly become difficult to manage.
A business line of credit is a way around this challenge – the structure allows you to draw as much as you need from your total credit line without having to worry about taking out additional financing to afford your growth plans.
What’s the difference between a line of credit and a small business loan? Both provide your business with the cash you need to grow, but the way these products are structured is different.
When you apply for a small business loan, you receive the full amount you qualify for in one lump sum deposit. A line of credit, on the other hand, offers more flexibility than most loans and cash advances. Instead, you have the option to draw cash in increments and continue drawing more until you reach your credit limit.
Typically, lines of credit have lower interest rates and closing costs, which can make them more cost-effective. Small business loans are the better choice when you’re taking on a huge project with defined expenses. Lines of credit can be better as a flexible backup to cover unexpected costs or as a backup for your bank account.
Choosing a business line of credit over another financing solution could also help you save money on interest. If you were to secure a term loan to meet your needs, you’d have to pay interest on the total borrowed amount, whereas you only pay on what you use with a business line of credit. Plus, making consistent, timely payments on your credit line will work to strengthen your business credit score, which is a priceless opportunity that all entrepreneurs should take advantage of.
How to get a business line of credit? Check that you meet the necessary requirements, then reach out to the experts at National Business Capital to explore the options you qualify for.
A business line of credit can either be secured or unsecured. The difference depends on whether or not your lender requires you to put up collateral.
Secured Lines of Credit:
Unsecured Lines of Credit:
Some lenders require that borrowers put up collateral, such as real estate, receivables, inventory, equipment, or their home, as a method of protecting themselves from financial loss if the borrower defaults. However, putting up your home as collateral puts both your personal and business lives at risk.
For this reason, it’s usually not a wise choice. Backing your financing with collateral simply gives the lender confidence in the event you default. Years ago, it was difficult for a small business owner to qualify for an unsecured line of credit, especially through traditional lenders.
Through the new world of online lending, small business owners can qualify for multiple unsecured lines of credit options and compare rates. While they don’t require collateral, unsecured options may have slightly higher rates due to the lender’s increased risk.
By putting up collateral and opting for a secured line of credit financing, you may qualify for a higher approval. That being said, you can usually still qualify for a competitive unsecured line of credit based only on your annual sales – even with personal credit challenges.
Fundamentally, credit cards and lines of credit are similar – they give you the ability to handle expenses when you need to.
Both financing products only charge interest on what you use rather than your total credit limit, but the interest is structured differently. A business line of credit is the ideal option for your small business if you’re growing or solving challenges and you need a lower-cost solution.
Usually, only about 3% of your minimum monthly credit card payment goes toward principal. Over time, this can add up to be quite expensive. Lines of credit typically have lower interest rates and better amortization schedules. Overall, this normally adds up to a lower total cost.
Credit cards are primarily transactional, meaning you can only use them to make purchases. It’s possible to borrow cash using a credit card, but this can be expensive. On the other hand, lines of credit give you the ability to instantly draw cash as you cover expenses and manage working capital.
If you’re debating between getting a credit card vs. a business line of credit, you should also consider fees. Some credit cards involve hefty interest rates. In most cases, these costs will outweigh the draw fees you may or may not pay with line of credit financing. If you opt for a business line of credit, you won’t accrue rewards like you would with a credit card.
However, you can maximize the value of both financing options by spending with your credit card to accumulate rewards, then paying the balance down with a line of credit. Using both has its advantages, but you should make sure that you’re choosing the best business line of credit and credit card for your business and where it’s headed by weighing out your options beforehand.
Lines of credit are intended to be flexible financing options custom-tailored to your needs. You can use them to cover expenses that are weighing your business down or pursue exciting new growth opportunities.
There are no restrictions on how you must spend this money – you can put it toward any expenses. Some of the most common ways that businesses utilize this business financing option include:
Access to a line of credit is like having cash on demand. The second you need cash, you can draw from your line of credit and get things moving.
You may also have to provide a personal guarantee, which is standard with most types of business financing, and is similar to a personal guarantee you already have with your credit cards.
What would you do if an opportunity to grow your business came along during your slow season? If you didn’t have the cash flow to take advantage of it, would you let the opportunity pass you by?
Business lines of credit make your opportunities attainable. You can quickly access funds, repay over an extended schedule, and enjoy a favorable interest format that allows you to keep your financing on the sidelines when you need it. Entrepreneurs with lines of credit commonly say that their cash flow and operations are more streamlined now that they have the right capital source in place.
Most business owners prefer a line of credit over other options because of how interest rates are structured. Rather than charging on the total approval amount, you’ll only pay interest on what you take.
This structure allows you to keep your line of credit on the sidelines when you need it – without worrying about excessive interest.
Determining your specific interest rate isn’t as straightforward as the payment structure. Rates can depend on a number of factors, including your time in business, credit score, annual revenue, and the lender you’re working with. Still, that doesn’t mean you should settle for an interest rate that doesn’t fit your business.
You should apply with multiple lenders to ensure you’re getting the best deal available. If you apply for a business line of credit online, the application process is much easier than dealing with that of a bank or credit union.
Applying through direct lenders one by one limits the options you could potentially qualify for, while applying at a marketplace leaves the door open to several potential options, ensuring you find the best one.
Applying for a line of credit is easy, and simply learning your options won’t affect your credit score. Here’s how it works:
Fill out our simple 60-second application to begin the process. Then, complete your online application by connecting your bank statements through our bank-grade portal in under 3 minutes.
Consider multiple loan options available within our marketplace. Hear your options explained by a knowledgeable Business Financing Advisor, and ask any questions you have.
Select the best option available and get funded in as little as a few hours. Start using your cash to grow your business right away, without restrictions on how you can use the funds.
We educate you on the best options available within our platform to ensure you get the best line of credit available.
Up to $100MM
Up to 25 years
1 to 7 days
You only pay on the amount you draw – not your total credit line. That means that – if you draw $50,000 from your $100,000 credit line – you’re only paying interest on the $50,000.
This structure allows you to keep your line of credit on the sideline for when you need it without worrying about unnecessary interest.
If your lender reports to a business credit bureau, then timely and consistent payments will work toward strengthening your credit score. Otherwise, your timely repayment will build “credibility” and “creditworthiness” with your lender, which can help you secure better terms in the future.
Interest rates range from 5% to 60%, depending on your business credit score, annual revenue, your time in business, and your willingness/ability to offer collateral.
Collateral, which can be equipment, real estate, or strong receivables, serves as an extra layer of protection against defaults for the lender. By offering an asset to secure your financing, you reduce the level of risk for the lender and, in turn, decrease the interest rate you’ll receive.
Yes, you can secure a business line of credit with a lower FICO score, but you should also be realistic about the terms you qualify for.
Lower FICO scores are seen as “risky” by lenders, so they’ll offer higher interest rates and lower credit limits as a result. You may have to offer collateral, too, as a method of securing the financing.
If your credit score is less than favorable, it’s worthwhile to consider proactively strengthening it before applying for financing. Not everyone has enough time to do this, of course, but even minor increases can yield big savings when it comes to interest rates.
Unsecured lines of credit require no collateral backing, whereas a secured line of credit comes with a collateral requirement. If you default on secured financing, the lender can seize the collateralized assets to recoup their lost cost.
Although unsecured credit lines don’t need collateral, some lenders require a personal guarantee or lien to approve your application. These give your lender the right to target your personal assets if you’re unable to repay your loan.
It’s important to understand whether your contract requires collateral, a personal guarantee, or a lien before you finalize it. Never be afraid to ask your lender questions or walk away if a contract doesn’t make sense.
If you’re looking to get a business line of credit, you’ll need to approach the situation strategically. Here are some steps to take.
At National Business Capital, you can simplify the process above and gain a financing partner simultaneously. With one easy application, you unlock all the most competitive offers you qualify for within our diverse lender platform. Your personal Business Finance Advisor helps you select the best one with your best interest placed at the forefront.
Although your specific interest rate depends on a variety of factors, business lines of credit generally carry lesser interest rates than business credit cards. They also feature higher credit limits, which allows borrowers an entirely different level of flexibility and financial power.
It all depends on your business and goals. For some, the flexibility of a line of credit makes it a better option than a business loan, while others prefer the lump sum format of standard term loans.
There are many businesses that need a specific format of credit. For example, a business seeking to begin a major renovation of multiple storefronts would benefit more from a longer-term, more substantial lump-sum product. If they had leveraged a business line of credit, they’d likely have their entire line drawn, which would significantly raise what they’re paying in interest.
If you’re unsure of which financing option is right for your unique circumstances, our Business Finance Advisors can help. Complete our digital application today to start the process with our team.
Here are a few of the many benefits of a business line of credit.
The flexibility of business lines of credit is the most prominent benefit. Unlike other financing options, you’re able to draw funds whenever necessary and enjoy an extended repayment schedule.