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A business line of credit is suitable for the small business owner who wishes to draw against a predetermined credit limit as needed, rather than taking out a traditional small business term loan that involves receiving the entire principle up front, thereby immediately incurring higher interest expenses.
The flexibility afforded by a business line of credit makes particular sense for the business owner who can prudently manage finances while maintaining visibility for working capital and financing needs.
Additionally, with a business line of credit, as borrowed funds are paid back, the available credit line expands to reflect the payments made against the debit balance, providing the business owner with an ongoing revolving line of credit that is not characteristic of a small business term loan.
Why Use a Business Line of Credit?
A business line of credit can function in a similar manner as an unsecured credit card does to the individual consumer – it can be effectively utilized when unexpected expenses or short-term cash flow constraints arise. A business line of credit should not be used for large-ticket purchases such as equipment or real estate (a traditional small business term loan makes more sense here), nor for managing everyday operating expenses on an ongoing basis.
However, for temporary short-term working capital needs such as making payroll during a seasonal slump or meeting expenses when receivables are piling up and cash is scarce, drawing on a business line of credit provides a welcomed measure of security and flexibility.
Other instances when a business line of credit comes in handy include when unique discounted purchasing opportunities arise that can save a business significant money on its cost of goods sold (a wholesaler in the process of going out of business suddenly offers bulk purchasing opportunities during a fire sale), as well as when unexpected emergencies and/or costly equipment repairs arise.
Applying for a Business Line of Credit
Business lines of credit are available from traditional lenders such as banks, as well as from a number of online lenders. Though banks generally provide lower interest rates and more attractive terms than online lenders, the application process at a bank is more time consuming and requires more documentation that must meet stricter qualifications than those at an online lender.
Regardless, all lenders will examine business credit scores (and sometimes personal credit scores), the amount of time the business has been operating and its level of revenue, along with its ability to pledge short-term (accounts receivables) and/or hard assets (equipment, real estate) as collateral in the event of default.
It is not uncommon to see business lines of credit up to and exceeding $100,000, and in the case of banks that offer SBA Caplines Credit, limits can run as high as $5 million for those small businesses who meet the high qualification requirements.
When To Apply for a Business Line of Credit
The best time to apply for a business line of credit is when the business credit score is strong and revenues are growing – even if the business may not need the credit line at that moment! Remember, with a business line of credit, interest expense accrues only when funds are drawn down, therefore maintaining an open credit line with no balance costs absolutely nothing.
However, it’s when things are going well with a business that lenders are most comfortable and interested – so, ironically, the best time to apply for a business line of credit is when a small business owner doesn’t really need it. However, once secured, the business line of credit can prove highly useful in the future when the need for capital arises.
Online Lenders and Business Lines of Credit
There are a number of online lenders who offer business lines of credit that can be secured in a more rapid manner than those available from traditional banks. Consult articles on this website related to Everest, OnDeck, Quarterspot, Kabbage, CAN Capital and LoanMe for further information related to general qualifications, terms, and the application process associated with their respective business lines of credit.
Interest rates charged by online lenders (APRs often exceed 20% and in some instances run substantially higher) are greater than those charged by traditional banks, but the application process is far less time consuming and the qualifications less strict, often resulting in a business line of credit being awarded within one day of the application filing.
For those small business owners who did not plan ahead and secure a business line of credit when business operations were strong, or that are suddenly facing unexpected expenses, or that simply have respectable qualifications but won’t quite meet the standards required by a traditional bank, pursuing a business line of credit with an online lender can make the most sense.
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