When you need more cash to run your business, you can turn to your trusted lender for a business line of credit. It can help you cover expenses over the short term, and once you pay it back, the funds are available when you need them again. You have more options than ever to secure a business line of credit conveniently and quickly, even if you’re operating a new business.
What Is a Business Line of Credit and How Is It Calculated?
A business line of credit offers your business access to money you can use to cover business expenses on a short-term basis. You apply for it like a business loan, but the requirements may not be as strict since you use the money on an as-needed basis versus a small business loan lump sum. Once you pay back the line of credit, the funds are available again for your use until the term of the credit line has been reached. Since every business is different, lenders will work with you to calculate your business line of credit using factors related to your daily cash needs and other considerations.
Types of Business Lines of Credit
There are two types of business lines of credit.
Secured Business Lines of Credit
Secured business lines of credit require you to have collateral you can use to guarantee you will pay back what you draw on your credit line. For example, assets like equipment, inventory or vehicles may serve as collateral the lender can claim if you don’t make payments.
Unsecured Business Lines of Credit
Unsecured business lines of credit are the most common type of credit lines, and they don’t require you to offer collateral. However, the lender may ask that you personally guarantee the amount your business borrows. In other words, you would need to pay the credit line from your own assets if the business cannot.
How To Get a Business Line of Credit Step by Step
Here is a step-by-step guide that explains how to get a business line of credit.
1. Decide How Much Funding You Need by When
The first step in getting a business line of credit is to decide how much funding you need and when you need it. Your lender can help you determine the amount that’s right for you based on a formula that calculates daily cash flow needs and factors during the duration of your line of credit. It’s understandable if you realize your need for money to cover expenses is urgent. A sudden need for cash may have you asking, how long does it typically take to get a business line of credit? The good news is that online lenders are known for easy applications and quick approvals, with funding made available as soon as the next business day.
2. Check Your Eligibility
Every lender checks your eligibility for a business line of credit using different criteria. Traditional banks focus on credit history, business revenue and time in business. Online lenders take a broader view of your business objectives while also weighing your credit score and business strength.
Credit History is one indicator banks and online lenders use to determine whether you are a good risk for a business line of credit. They will review your personal credit score to gauge your ability to pay back debt. A good credit score is 670 and above on a scale of 300 to 850.
Business Revenue is a key indicator of the strength of your business, so lenders will consider it when deciding whether to extend a business line of credit. If you have not been in business long enough to have established a track record of profits, you may find online lenders to be more accommodating.
Time in Business is one requirement of traditional banks and credit unions for business financing. Most will require at least two years in business and possibly more before considering your loan application.
3. Research and Compare Lenders
The next step is to research and compare lenders. There are more options than you may be familiar with, giving you the flexibility you’re looking for with a business line of credit.
Traditional banks offer a wide range of business loans, and they also have stricter rules when it comes to qualifying for them. For example, you may need collateral. You likely need to have been in business several years and have strong revenues to be considered by a bank for a business line of credit. Also, you’ll need a good personal credit score to get approved.
Credit Unions are typically not-for-profit financial institutions, so they can charge fewer fees and offer better interest rates than traditional banks. Credit unions have similar requirements for business financing as banks do, with expectations for your business to be in operation for several years and show good credit with significant annual revenue.
Online Lenders are more accessible than banks and credit unions since the process happens online. Streamlined applications mean fewer fees. Some online lenders offer fast financing to new business owners who may not have the long track record banks and credit unions require.
4. Check Costs and Fees
The bottom line is that you will pay a lender whenever you borrow money. That’s why it’s important to check costs and fees when choosing a lender. You may save money by selecting a lender that charges fewer fees or can offer you a lower interest rate based on your qualifications. Some fees are negotiable with your lender, and online lenders often do not charge the range of fees common with traditional banks.
To help you understand potential costs and fees, here is a list:
- Payment processing fee or origination fee. Most banks charge a fee to process your application for a business line of credit.
- Interest rate is the amount you will pay for your line of credit, charged as a percentage of what you borrow. With a line of credit, you pay interest only on the amount you use versus a traditional small business loan, where you pay interest on the total amount of the loan.
- Account maintenance fee is what some traditional banks and other financial institutions charge monthly or annually for keeping your account active. It may be a fixed amount or a percentage of your outstanding loan.
- Draw fee is what you pay when you take a draw on your business line of credit.
- Late fee is what lenders charge if your payments are late.
- Termination fee may be charged if you cancel your line of credit or other business accounts with a traditional bank or credit union.
- Prepayment penalty is what traditional banks and credit unions may charge if you pay off your business line of credit or term loan before the date agreed upon by you and the lender at the time of loan approval.
- Inactivity fee is what some lenders charge if you are approved for a business line of credit but don’t use it within a certain timeframe agreed upon at the time of the application.
5. Prepare Your Documents for the Application
Depending on your lender, you will be asked to support your loan application with many different business and personal documents. It’s best to be prepared so you can satisfy the lender’s requirements, especially if you need the funding quickly. You may not have all the documents if your business is new. If not, find out what is required by the lender you’re working with and take steps to secure the right documents. Documents needed for the application may include:
- Personal and business tax returns for at least two years.
- Personal and business bank statements for three to six months.
- Business plan. This written plan details the basics of your company, such as location, management team and products and services you offer. Competitive analysis is also included in business plans to explain how you are different from the competition, financial statements, and sales strategy.
- Articles of Incorporation
- Profit and Loss Statements
- Financial Statements, which may be included in your business plan.
- Business Licenses, if applicable
- Building Lease, if applicable
