What Does “Business Line of Credit” Actually Mean?
If you’re the owner of a fast-paced business that faces unexpected challenges and opportunities on a regular basis, there’s a good chance you’ve heard of or been recommended to acquire a business line of credit. But what exactly does the term “business line of credit” mean? How does it work, and what can you use it for?
Read on to learn the answers to all these questions and more!
What Does “Business Line of Credit” Mean?
The term “business line of credit” describes a credit line which can only be used by business owners. These lines of credit are provided by lenders including banks, direct lenders, and other alternative business financing companies.
A business line of credit operates similarly to lines of credit required for personal use, in that a credit line is provided with a determined maximum that business owners can withdraw from.
This withdrawal limit is determined by many factors, including the qualification standards set by the lender who provides you with your credit line, as well as your FICO score, the amount of annual gross sales your business makes, and the total amount of time your business has been active.
How Does a Business Line of Credit Work?
- Step 1: Get approved for a credit line through a bank or alternative lender. Typically, banks require higher FICO scores, greater sales volumes, and longer times spent in business to qualify for a credit line than alternative lenders. Click here to see if you qualify for a business line of credit through alternative financing.
- Step 2: Gain immediate access to cash on-hand. Different from a business loan, in which you’re obligated to eventually use all the funds borrowed, you can withdraw whatever amount you need from your credit maximum at a time. Any funds you do not use will be available for you whenever you need it.
- Step 3: If you obtain a revolving business line of credit, you have the option to replace any funds used back into your credit line, where it will become available again for future use. This is extremely useful among business owners that always need to be prepared with cash on-hand to take immediate action on unexpected challenges and opportunities.
- Step 4: With a business credit line, you only have to pay for the amount of funds you use. This provides excellent protection against over-borrowing or over-spending, which can be a common problem business owners have with using traditional funding methods including SBA loans.
Types of Business Credit Lines
There are many types of business lines of credit available for business owners, including:
- Secured Business Lines of Credit: Credit lines that are leveraged by assets held as collateral by the business owner. The reduced “risk” lenders take on due to securing their capital typically results in terms that are more desirable for the borrowing business owner.
- Unsecured Business Lines of Credit: A credit line that does not require collateral in order to get approved. Through certain alternative financing companies, these can come with terms that are just as desirable if not more so than secured business credit lines.
- Revolving Business Lines of Credit: A credit line with “revolving” terms, meaning a business owner can replace any amount of funds they withdraw back into their credit line, where it will become immediately available to use again.
- Accounts Receivable Lines of Credit: These are nearly identical to revolving credit lines, with the key difference being that the credit line is leveraged by the receivables belonging to a business owner. These are known for their low prime lending interest rates+, and flexible financing terms.
Each type of credit line comes with unique terms that help business owners meet their unique goals in different ways, and conform to their specific business model.
When considering using a business line of credit to fund your business, make sure you explore all your options in order to find the financing option that best fits your specific needs.
Use a Business Line of Credit Calculator
If you need help deciding, you can always get in touch with an Expert Advisor for a free consultation, or use the business line of credit calculator by clicking the link below to quickly find the terms you decide best match your business funding goals.
Go to Business Line of Credit Calculator
Top 3 Advantages of a Business Line of Credit
There are several advantages to having a business line of credit that no other financing option can provide. Here are the top 3 ways business lines of credit help business owners accomplish their funding goals faster and easier:
- Your company can have a steady flow of cash during periods of lower revenue.
Let’s say that you own a retail store that is seasonal. Most of your sales may come during the holidays or over the summer. Other times of the year, your business may be short on cash which makes paying employees very challenging.
In these cases, a business line of credit provides a fast and simple way to bridge gaps in cash flow, and keep your operations running smoothly.
- It helps your business take advantage of opportunities faster.
For example: a manufacturer is informed the prices provided by his or her supplier will drop for a limited time. The manufacturer will want to purchase products at a discount. However, at the time, he or she may not have the available capital to do so.
By opening a business line of credit, they minimize the likelihood of missing such a great opportunity.
- You can bolster the credit history of your business.
By maintaining a line of credit that’s in good standing, you may be able to increase your business’ credit rating. The better your rating, the better the loan terms for which you will qualify. This is especially important if you have a need for future financing.
How Do You Qualify for a Business Line of Credit?
Most business lenders and banks place a heavy emphasis on credit score and extensive financial history in their approval process.
This leads to a high rate of rejection among business owners with less-than-perfect FICO scores, and blemishes on their banking history.
Through alternative financing companies like National, all you need to qualify for a business line of credit is:
- 3+ Months in Business
- $120,000 in Annual Gross Sales
- NO Minimum FICO Score Required
- Depending on the type of credit line you apply for, collateral may or may not be necessary. Consult with your advisor to tell them whether or not you are willing to leverage your assets, and they will get to work finding the best secured or unsecured credit line option for you.
Factors That Will Determine the Interest Rate of Your Credit Line
The interest rate of a business line of credit will be affected by a few factors.
Your personal credit history will play a major role in establishing the interest rate. This is typical for new or small businesses. As time progresses, your organization can establish credit that is more business specific and less personal.
The loan’s features will also help determine the interest rate. Financing that poses higher risk to the lender will have higher interest rates. The level of risk depends on the amount of capital applied for, and the type of collateral that’s leveraged (if necessary) to secure it.
For financiers, lending funds to a startup can be precarious. So, the features of your company and number of years you have been in business can affect your rate for the better or for the worse. If your business maintains substantial revenue or if it has been around for several years, your interest rate will be lower.
The state of the economy overall will also have an impact on your interest rates because the interest rates are “spread” above the rates of the market. The rate of interest for your business line of credit may be 3% above interest rates offered by the Federal Reserve.
3 Tips Before Applying for Business Credit
- There is a direct correlation between the length of the repayment terms and one’s ability to qualify. The shorter the terms on the loan, the more confident the lender will be that the loan will be repaid.
Loans that have longer terms, such as SBA loans, commonly demand a very strong credit score and an extensive financial history. That is—unless you seek new and easier-to-get SBA financing through new options including the Hybridge SBA Loan™.
Because the plan for repayment is longer, the financer needs additional assurance that you are a reliable borrower. You should keep in mind that the type of business credit you will be granted will still depend on your financial history and your credit score. If both are sound, you should be able to acquire a line of credit that is medium or even long-term.
- If there are derogatory marks on your credit report or your credit score has significant areas that need improvement, you will only have access to a line of credit that’s short term.
But if you use the short-term line of credit wisely, it can a valuable tool that will help bolster your credit. Eventually, you will be granted access to more favorable loans in the future.
- When it comes to finding the best business line of credit for your business, keep the interest rate of your financing at the forefront of your thoughts. To avoid paying an excessive amount of interest every year, get familiar with what can affect your interest rate.
Determine which interest rate works best for you by using the business line of credit calculator here, or read on for more information.
Apply for a Business Line of Credit
At National, we made the business credit line application process as simple and speedy as possible for you.
All you have to do is fill out our simple 1-minute application online. When the application is completed, a Business Financing Advisor will contact you in minutes to consult with you, and determine the best financing option for your business moving forward.
After consultation, business owners typically receive funds from their credit line in as little as 24 hours.
Click the link below to start your application, or call (877) 482-3008 for a free consultation.
National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!