The Ultimate Guide to Business Lines of Credit

A line of credit allows you to withdraw against a specified credit limit whenever you need cash instead of getting the whole amount at once. The advantage of this funding is that you will only pay interest on the amount you have used. This means that you will not pay interest on funds that you are not using.

A commercial line of credit is a revolving account. For this reason, whenever you pay a balance on the line, you will be increasing the amount of money for future use.

What are small business lines of credit?

This funding option allows you to withdraw funds when the need arises. Once you establish your line of credit, drawing is the quickest way of accessing your funds. Since this is a convenient and affordable source of capital, it is a very common tool for many business owners.

Where to get a business line of credit

Small business lines of credit can be obtained from traditional lenders such as regional credit unions and banks. When looking for the right provider, you need to ask yourself these questions:

How much capital do you need? – This funding option tends to have a smaller borrowing limit than a term loan, making it perfect for unexpected expenses but not large investments.

Do you meet minimum requirements? – Most lending institutions have minimum qualifications and require you to have specific collateral.

How much are you willing to pay? – Banks offer cheaper lines of credit than online lenders.

However, if you want to use yours for high-ROI opportunities, borrowing from online providers would be a great option.

How soon do you need it? – Although short-term loans are easy to obtain, a LOC is even faster.

Online lenders vs. banks

Although most lenders usually base their decision on several factors, the qualifications that you must meet vary greatly. Banks have more minimum qualifications but tend to be more affordable than their online counterparts. On the other hand, online lenders provide faster capital access and tend to approve even those businesses that banks will not.

Even if your small business meets the high bank qualifications, you might have a hard time getting a LOC unless you bring other accounts with you. Applying for a bank LOC can be a lengthy process, which involves many trips to the bank and takes weeks. Moreover, establishing an LOC with a bank could limit you from working with other financial partners in future.

Online lenders usually meet the LOC demands of small businesses. Although this line of credit might seem costlier, it could be a good fit if you cannot meet bank requirements. Online providers have come up with a way to provide lines of credit faster with as little paperwork as possible.

If you have bad credit, you can get an online LOC. However, you should consider repairing your credit if you want to get the best line of credit. Consider looking into software reviews for credit repair solutions to find out the best way of repairing your credit.

How to use a business line of credit

Ideally, your business line of credit should be used in the same way that you would use a family credit card: in case of emergencies and to pay for unexpected expenses. An LOC should not be used for big purchases such as machinery or real estate.

In short, you can use them in the following situations:

  • Short-term working capital – they can be used to pay for expenses when business is slow or make payroll;
  • As safety net for emergency costs;   
  • To take advantage of unique purchasing opportunities;
  • To offer customers trade credit more confidently.