Nowadays, it’s easier than ever to get the funds your business needs for growth and expansion.
Alternative, “non-bank”, financing has afforded even small business owners with bad credit the ability to obtain financing, gaining access to funds for everything from new equipment to employee training.
One such option is a business line of credit, a powerful form of consistent financing that works much like a credit card.
However, while most business owners have heard of business lines of credit, few truly understand the ins and outs of this versatile form of business financing.
How a business line of credit works
Similar to a credit card, a business line of credit gives you as the business owner access to a form of revolving credit in the form cash – with the flexibility to use when you need it.
Once you draw down capital for one of many reasons like to pay for new hires, equipment, or extra materials just before a busy season, you pay it off, typically with two options a 6 or 12 month revolving option. Revolving meaning that every dollar you draw down on is automatically repaid in either 6 or 12 monthly payment increments. When you make payments towards the balance more capital is available. So the money revolves. Once you pay off your balance, that credit becomes available once again, and so on and so on.
There are two types of business credit lines:
- Unsecured line of credit: This line of credit doesn’t require collateral but your limit is typically smaller and interest rates higher.
- Secured line of credit: The opposite of an unsecured line of credit, a secured line of credit requires collateral such as cash savings, property, or personal assets, however, limits tend to be higher and interest rates lower.
Let’s talk about collateral for a moment. After all, it’s a bit of a scary word. Collateral makes obtaining a loan riskier for you as the borrower and more secure for the lender. Collateral typically includes business property, personal assets such as your car or home, cash savings or other liquid accounts, and anything else that can be transferred into cash by the lender in the event that they need to collect.
However, it’s important to keep in mind that, in most cases, assuming you’re borrowing from a non-bank lender, that collateral will actually be something much safer for you such as inventory or accounts receivable. Keep that in mind if you’re considering a business line of credit for your funding needs.
What can you use a business line of credit for?
We’ve touched on this already, however, you can use a business line of credit for virtually anything your business needs.
- Hiring new employees as well as employee training
- Buying inventory
- Renovating your location
- Purchasing equipment
- Improving cash flow
- Purchasing material
The flexibility of a business line of credit, combined with the convenience of it, creates for an optimal funding solution no matter what your business is in need of.
This can be because you have one particular season in the year that always spikes, requiring you to purchase extra material to meet the demand, or because you’re experiencing consistent expansion and regularly need to stretch outside of your current reserve to allow for optimal growth.
How to get a business line of credit
So, you think a business line of credit might just be right for your business. What will you need to qualify?
Every lender is different, however, there are certain universal requirements that almost all lenders follow.
- Must have been in business for 1 or more years
- Have a credit score of 540+
- An annual revenue of $50,000 or more
- And your business must be in good standing
You’ll typically be asked to fill out a short application as well as providing the last several months of your business’ bank statements. If you do not have one, you can open a bank account online.
And it’s important to keep in mind that, based on your credit rating and business health, the amount of funds you’re approved for as well as the duration and repayment terms of your business line of credit will be different.
However, alternative lenders tend to have a much fairer approval system that takes into consideration more than just credit, including revenue and profit, so don’t worry if you don’t have perfect credit.
If your business is in need of additional funds, especially if it’s on a recurring basis, a business line of credit just might be the perfect vehicle for allowing your business to grow to its full potential.