When you start your own business, you’ll need all the capital you can get. A business line of credit is an excellent way to raise funds in order to buy stock, equipment and other necessities to get your business up and running. Let’s take a look at everything you need to know about starting a business line of credit, including how they work, the benefits of getting one and how to apply for one yourself.
The difference between a line of credit and a loan
One of these is a lot like a credit card, and one is not. The biggest difference between a loan and a line of credit is how they’re accessed. A loan is an amount that is borrowed and must be paid back with interest. On the other hand, a line of credit has no set limit and there are no repayment terms. A business will draw from its line of credit only when it needs to spend money—and if it doesn’t spend all that it requested, there won’t be any accrued interest on what hasn’t been spent yet.
How do I get approved for my business line of credit?
A business loan officer is going to run through a checklist of items before approving or declining your application. Your company’s financial picture, personal debt, and liquidity are all important factors that will be checked before they make a decision. They will likely want to see three years’ worth of tax returns, bank statements and W-2s (if applicable) in order to give you an accurate idea of what your net worth is and how big a risk they’re taking by approving your request. You will also likely be asked about any pending lawsuits against your company, whether or not it has been sued in the past and if it has filed for bankruptcy at any point in its history.
What are the different types of lines of credit for businesses?
There are two main types of lines of credit for businesses. The first is a Revolving Line of Credit, which allows you to borrow money when needed and pay it back at a later date. This is typically used for short-term financing needs. For example, if your business needs funds to pay off its current debts or expenses before getting paid by customers in 30 days’ time, a revolving line could provide that cash flow until those accounts receivable were collected. The second type is an Open-Ended Account, which lets companies borrow up to an agreed limit.
How does a business line of credit work?
A business line of credit is a form of financing that allows you to borrow money whenever it’s needed. Businesses use lines of credit as short-term capital during times when they don’t have enough cash on hand, such as making payroll or paying for big purchases. There are two main types of business lines of credit. Some come with a set limit and others come without one (though they may still have a maximum balance). If your business has good collateral, such as real estate or equipment, lenders will be more willing to provide you with an unsecured loan. With a secured loan, if your company can’t pay back what it owes after using all its assets for collateral, then you or other creditors may not get back what’s owed.
Is there anything else I should know about lines of credit?
You may hear some people refer to lines of credit as a soft loan. In reality, these lines are not a loan at all. When you take out a business line of credit, your provider doesn’t give you any money and doesn’t charge interest until you use it. This can be a huge benefit for startups who may not have established enough cash flow yet to qualify for an actual business loan but still want or need access to capital for their startup’s expenses such as marketing, inventory and materials purchases, etc.
How long will it take before I receive my funds?
Typically, a business line of credit will provide instant access to funds. However, depending on your bank and how quickly it processes funding requests, your funds may take up to two days. You should be prepared for delayed payments as a result. When in doubt, ask about timing when applying for a new business line of credit from your bank. In addition, make sure you understand what fees will be applied if your account takes longer than expected to fund or if any problems arise that require additional information from you.
What are some other great reasons to consider getting a small business line of credit?
If you want a more flexible option than a traditional bank loan, a business line of credit can be ideal. Lines are generally repaid over three to five years, while one-year loans are not available. To get your business started on its own two feet and leverage your existing resources, it might make sense to look into whether or not a line of credit is an option for your startup. It could provide easier access to funds at key points during your company’s life cycle, as well as valuable ongoing financial flexibility that’s harder for other types of loans (such as small business loans) to match.
In closing, I would like to say that a business line of credit can be an incredibly useful tool for both established and startup businesses. However, it is important that if you are going to apply for one, make sure your business is ready. Also be prepared for how hard it will be to get approved! After all, there is no such thing as easy money. If you do end up applying and being denied, check out my other post on Small Business Loans as an alternative.