Understanding a Business Line of Credit

Published

Nathan Abadi, Excel Capital Management

 

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 and gain 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 paying for new hires, equipment, or extra materials just before a busy season — you pay it off, typically with a six- or 12-month revolving option. Revolving meaning every dollar you draw down on is automatically repaid in either six 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:

  1. An unsecured line of credit: This line of credit doesn’t require collateral, but your limit is typically smaller and your interest rates higher.
  2. A secured line of credit: The opposite of an unsecured line of credit, this 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 they need to collect.

However, in most cases, assuming you’re borrowing from a non-bank lender, 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 you can use a business line of credit for

We’ve touched on this already. You can use a business line of credit for virtually anything your business needs. Most people like to use it for working capital to help stabilize the ebbs and flows of the natural business process. Other uses include:

  • Hiring new employees as well as employee training
  • Buying inventory
  • Renovating your location
  • Purchasing equipment
  • Improving cash flow
  • Purchasing materials

The flexibility of a business line of credit, combined with the convenience of it, creates an optimal funding solution no matter what your business needs.

For example: Maybe one particular season always spikes, requiring you to purchase extra materials to meet the demand. Or maybe 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 be right for your business. What will you need to qualify?

Every lender is different, but there are universal requirements almost all lenders follow.

  • You must have been in business for one or more years.
  • You must have a credit score of 540 or higher.
  • Your annual revenue must be $50,000 or more.
  • Your business must be in good standing.

You’ll typically be asked to fill out a short application as well as provide the last several months of your business’ bank statements.

And it’s important to keep in mind, based on your credit rating and business health, the funds you’re approved for and the duration and repayment terms for your business line of credit will be different.

Alternative lenders tend to have a much fairer approval system that takes into consideration more than just credit but revenue and profit as well, 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.

 


About the Author

Nathan Abadi is the President and Co-Founder of Excel Capital Management, a Direct lender in the Fintech Space that delivers the best alternative funding solutions to traditional bank loans for small businesses. With 15 years of experience in financial sector and entrepreneurial experience.

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