A business line of credit is a good alternative to a traditional loan, especially when unexpected expenses pop up. It’s a hybrid between a credit card and a loan, eliminating the drawn-out underwriting process when you need capital. Small businesses can benefit from having an available line of credit.
It’s a revolving line of credit – you’ll be able to access some or all of the credit limit as often as you need, as long as you don’t exceed the limit. For example, if your lender approved your company for a business line of credit of $40,000, you can draw $25,000 and still have $15,000 left to borrow. Once you draw on your line of credit, you’ll need to replenish it by paying back the balance in installments. You’ll only pay interest on the portion you borrowed, and you can continue to borrow from the available balance while you pay off the line of credit. There are no limits to how often you draw on a business line of credit as long as you stay within the limit and make timely installment payments. Once the line is established, you have peace of mind knowing that you have access to the funds right away. You don’t have to worry about applying for a loan. Simply transfer funds from the line of credit to your business bank account or write your company a check from the line of credit account. Once you’re ready to apply, shop around for lenders offering business lines of credit. Most banks and credit unions will offer them. If you already have a business bank account, ask about a line of credit since you’ve already established a relationship with the financial institution. To apply, you will probably need to submit:
Two years of personal tax returnsBusiness tax returnsCompany profit-and-loss statements and a balance sheetBusiness bank statementsYour personal information, such as Social Security number and identification
To apply, you’ll need a credit score of 600 or higher and be in business for at least six months, with $10,000 in monthly revenue. Each time you draw funds, you’ll need to pay them back in weekly or monthly installments over six or twelve months. However, applicants with poor credit may see a higher interest rate. You can prequalify for a Credibly business line of credit as long as your business has been running for at least six months and you have an annual income of $50,000 or more. However, the speed and convenience of an OnDeck business line of credit comes at a cost: the APR starts at 35.9%, depending on your creditworthiness and company financials. Rates start at Prime Rate plus 1.75%. Wells Fargo doesn’t require collateral, but you’ll need to provide personal and company financials.
Pros:
You’ll only need to apply one time for fundingYou can draw on the revolving credit line whenever you need capitalIt can help build business creditYou only pay interest on the outstanding balanceLines of credit are typically available for several years – as long as you keep up with the payments, the credit line should be available
Cons:
The credit limit may be smaller than the amount you’d receive for a small business loanThere is usually an annual feeThe lender may cancel the line of credit or reduce itInterest may be higher than a business loanYou may need to provide collateral
