A small business line of credit (sometimes called an LOC) gives entrepreneurs access to a predetermined amount of credit that they can draw from as needed as opposed to receiving the entirety of the loan as an “lump-sum” and then having to start paying down on that loan (and all that interest) immediately.
Best of all, these kinds of lending options are also much easier to apply for and a lot easier to get approved for as well. According to the Small Business Administration nearly 27% of business owners were unable to get the funding that they needed to start or grow their business.
That won’t be a problem with a business line of credit for the majority of entrepreneurs, regardless of their credit score or credit history.
Let’s dig a little deeper into everything that a business line of credit has to offer strategic business owners today.
What Exactly Is a Business Line of Credit, Anyway?
As we highlighted above, a business line of credit is essentially a financing package that provides you access to funding you need as you need it rather than giving you a lump sum directly deposited into your business bank account that you have to start paying back ASAP.
It’s easy to think of an LOC as a “take what you need, when you need it” kind of financing package. These kinds of financial packages are like business credit cards on steroids.
You may be approved for say $100,000 of small business LOC (and you’ll have access to all of that $100,000 if necessary), but if you only need $15,000 right now to pay for marketing or advertising campaigns that that’s what you will draw off of that line of credit – and that’s the amount you will be charged interest on as well.
What are the Benefits and Drawbacks of Using a Small Business Line of Credit?
The biggest advantages of applying for (and later getting approved for) a business line of credit have to be that you only ever pay interest on the amount of funds that you draw from as well as that you have instant access to working capital when you need it most.
Entrepreneurs with bad credit can take advantage of these kinds of financing packages as well, something that cannot be said about more traditional business installment/term loans from legacy lending institutions.
It’s a good idea for any strategic entrepreneur to apply for this kind of financing ASAP, getting approved and then gaining access to a source of funding they don’t necessarily have to pull from immediately – but will have the opportunity to pull from should an opportunity for emergency arise.
Once this line of credit is in place the access to funding whenever you need it rather than having to go through a potentially drawnout application process that might see the opportunity pass you by for emergency escalate.
On the flip side of things, any lender offering you a small business line of credit is going to require regularly updated reports regarding your business, your finances, your cash flow situation, and a host of other key metrics that you will have to provide on a continuous basis.
Most lenders also reserve the right to terminate a line of credit as they see fit and at their discretion, often times with very little notice whatsoever. You might also be required to put up some sort of collateral that secures this business line of credit, though there are unsecured business lines of credit available as well.
Unsurprisingly, entrepreneurs with lower credit scores and poor credit history are going to have to pay higher interest rates on the money they draw from these lines of credit.
Look to Take Advantage of Unsecured Business Lines of Credit Whenever Possible
As we made mention of above, there are unsecured and secured small business line of credit opportunities available on the market today and any entrepreneur serious about the success of their business should look to leverage unsecured business lines of credit whenever possible.
Putting up collateral will certainly help tip the scales in your favor during the application process if you are a new entrepreneur, a serial entrepreneur, or an entrepreneur with little cash flow and poor credit.
But you also risk losing that collateral should you default on this line of credit at any point in time – and with the skyhigh rate of business failure in the United States in the first five years the odds are certainly stacked against you.
It’s worth moving through the application process for an unsecured business line of credit opportunities before you start hunting for a secured small business line of credit deals. If you are denied an unsecured opportunity, the collateral you are required to put up will almost guarantee that the previous denial doesn’t hurt your chances with a secured LOC package.
What to Look for in the Best Small Business Line of Credit
With so many different business LOC opportunities available to pick and choose from, finding the right one for your business and your needs becomes a bit of a challenge.
To simplify and streamline the process as much as possible it’s important to focus on these key criteria:
Qualifying Requirements
Certain lenders in the small business LOC space are going to have more stringent qualifying requirements during the application process than others. If you do not have sterling silver credit, a long time operating your business under your belt already, and rock-solid financials with cash flow that makes you a very attractive prospect to lenders it’s important that you shop for lending opportunities that are a little less stringent in who they offer cash and capital to.
Interest Rates
The overwhelming majority of small business line of credit opportunities have variable interest rates attached to them. It’s important to understand that the beginning rate or APR you have attached to your LOC is likely to change, but narrowing down its range of change as much as possible is a big piece of the puzzle.
Lending Limits
The larger LOC you are able to receive right out of the gate (or the potential to increase that LOC limits later down the line) is critical, as you will want the largest available pool of capital to pull from even if you have no intentions of “maxing out” your business line of credit immediately. It’s always better to have too much access to readily available capital than too little.
Payment Rules and Fee Schedule
This is the part of every business LOC that is written in the finest, tiniest print possible and also the part of your LOC contract that will usually be glossed over quickly by the people offering you these kinds of lending packages.
But that’s how you know you need to focus like a laser on these areas.
The repayment schedule that you must keep, the minimum payments you must abide by, and the penalties or hidden fees that may be attached to your business line of credit all need to be fully understood before you sign on the dotted line.
It’s critical that you know exactly what you’re getting into before you gain access to any LOC. Understand how this short-term financial solution is going to impact your long-term financial projections and move forward with both eyes open.
Take this kind of approach and you’ll have no trouble at all finding the best business line of credit for your specific needs!
What Is a Business Line of Credit?
A line of credit is a highly flexible financial tool. You draw funds from a line of credit when you need them: That could be as frequently as once a day, but it also could be once a month or even just once a year. There is no additional cost to draw down funds–and no obligation to do so. A line of credit is a financial tool that you can simply keep in your back pocket.
When you do need to draw down your line of credit, Lending Valley and its funding partners have made it very easy. You can access your line of credit account at any time of day, any day of the week from any computer, tablet or smartphone, and have the funds you need at your disposal in minutes. You’ll repay the funds you draw down in fixed weekly installments over several months, and as you do, you are building a credit profile for your business, something that can help you qualify for a larger loan down the road.
How Can I Get a Business Line of Credit?
Lending Valley has streamlined the application process for all kinds of funding. Thanks to our sophisticated technology, we require very little documentation from applicants. Nearly every industry can qualify for a business line of credit, although you will generally need to be in business for at least a year and meet a minimum monthly sales threshold. You may also need to pledge collateral to secure your business line of credit.
How Can I Use a Business Line of Credit?
You have many options, and unlike a loan, which is generally for one specific purpose, you can use a business line of credit for many different things at once. You can use a business line of credit to purchase inventory or fund construction work on a remodeling. You can use it to close a cash-flow gap when you have a late paying customer. You can use it to smooth out seasonality in your business. How and when you use a business line of credit is up to you.
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