The Ultimate Guide to a Business Line of Credit - Complete Blueprint for Your Businesses Growth
It's the nature of business to be cyclical. This means your company's cash flow will find it's own high and low points as well, throughout the seasons and throughout the years. Will you make it from this ebb to the next flow? Would getting a cash infusion in the form of a business line of credit help your business grow? And how can you best use this cash infusion to improve your business?
Let's start with the basics - A small business line of credit (business LOC) allows a borrower to draw against a lender specified amount of financing on an as-needed basis. The advantage of a business line of credit is that you only pay interest on the funds you actually draw, so you’re not stuck paying interest on capital you don’t have an immediate use for.
The traditional line of credit is typically meant for experienced business owners with proven business models. Which makes sense since the credit maximums are sizable, the rates are lower, and the requirements demand slightly higher credit scores and annual revenue reporting. If you’re a business owner taking out a line of credit, you’ll be spending that flexible cash on seasonal business expenses, payroll and other operational costs, insurance against emergencies and for sudden opportunities. In other words, as a capital cushion. It’s there for you when you need it. Simply put, a business line of credit makes sense on every level.
When your company needs cash to cover impending expenses, you don’t have time to waste compiling overly detailed loan applications. Having a business line of credit in place provides access to a guaranteed amount of money any time you need it so that you never find yourself in a financial bind.
Get a fast and flexible business line of credit
Enjoy the flexibility of a revolving line of credit. Draw as you need and pay only for what you use.
Credit lines up to $250,000
Rates as low as 4.8%
Approvals as fast as 20 minutes
If you routinely require small amounts of money to keep your business going rather than large lump sums for occasional expensive purchases, a business line of credit could be right for you.
Business Line of Credit vs. Business Loans
There are many types of small business loans, but a line of credit is somewhat different. The choice between applying for a business loan or a line of credit loan depends on how much cash you need and what you intend to use it for. Business loans typically:
Provide one-time lump sum payments
Require repayment at a fixed interest rate
Have stable, predictable monthly payments
Include closing costs or early repayment penalties
Lines of credit, on the other hand, are similar to credit cards in the way the money is accessed. If you qualify for a business line of credit, you can expect:
A set amount of money to borrow against
Flexibility to borrow as much as you need at any time
Monthly payments calculated based on how much was borrowed
Variable interest rates lower than the prime rate
A draw fee for borrowing against the credit line
Few or no closing costs
The difference between a short-term line of credit and a traditional line of credit is more or less the same as the difference between your typical short-term loan and conventional bank or longer-term online loan Therefore, a short-term line of credit has a higher interest rate, lower credit maximum, faster turnaround time and easier application requirements. Unlike the traditional line of credit, the short-term line of credit is generally offered by alternative lenders rather than by banks. The point isn’t that one is better or worse, they appeal to different groups of business owners. Those with lower credit scores, smaller annual revenues, or newer businesses might only qualify for a short-term line of credit. And although the short-term line of credit tends to be more expensive, its value lies in giving younger small businesses the opportunity to maintain a flexible pool of capital. A small business line of credit provides flexibility that a regular business loan doesn’t. With a small business line of credit, you can borrow up to $250,000 and pay interest only on the money borrowed. You then draw and repay funds as you wish, as long as you don’t exceed your credit limit. Need to manage cash flow? Buy inventory? Pay for a surprise expense? Then a business line of credit makes perfect sense.
Is a business line of credit a good fit for my business?
While it’s ideal to have savings to help your business weather storms, the next best thing is to apply for a line of credit. Business credit lines were designed to help you meet short-term cash needs, such as purchasing supplies or additional inventory or covering operating expenses. Essentially, a business line of credit can help small businesses thrive and grow. A business line of credit is a good option to offset fluctuations in working capital when your expenses stay constant. A line of credit will give you access to funds to continue to pay bills on time or purchase additional inventory if needed. The advantage of a line of credit over a regular business loan is that interest is only charged on the funds you actually use.
Applying for a Line of Credit: The Basics
Like a business loan, a line of credit may be secured or unsecured. Secured credit lines need collateral to back them up. Unsecured lines are guaranteed by your business and require more trust on the part of the lender. In both cases, you’re at risk of loss should you be unable to make payments. The lender will either take possession of your collateral or have the choice to sue you for what you owe.
To avoid these problems, work to build up a good credit score for your business and yourself. Have a dedicated business bank account, and stay on top of all your payments. Keep detailed records of cash flow, profit and loss, accounts payable and receivable, revenue streams, assets, and income. Most lenders will want to see this information when deciding whether or not to extend a line of credit to your business.
Benefits of a Business Line of Credit
You may wonder why it’s worth the effort to go through the application process for a line of credit when a credit card offers similar borrowing options. However, credit cards can hit you with fees and penalties subject to change with little warning. Interest on a line of credit is often lower, and making regular payments also builds up your credit rating.
When compared to a business loan, the monthly payments on a credit line tend to be smaller, and you don’t have to worry about the money “running out” when you need it most. Instead, you have a set credit limit to draw from for the duration of the loan term. As long as you’re diligent about paying off what you borrow, you won’t be saddled with the specter of long-term debt.
Why Should You Have a Business Line of Credit?
It's great to consistently have enough cash stored in your bank account to cover ongoing expenses. That probably means your business is doing well. But you also may want to consider the ways that having a business line of credit can work to your advantage. Chances are, there'll be situations over the life of your business where it would make more sense to borrow, rather than completely empty your accounts.
If you were suddenly hit with an emergency, what would that do to your available cash? By spending a lot of money to fix your problem, you could end up sacrificing all that available cash—which is one of your most valuable assets. Opening a business line of credit can help protect your assets by giving you a short-term boost to your cash flow.
But they're not just to help in an emergency. A business line of credit can also be helpful when you have a chance to make a significant investment that can immediately improve your business. What if you come across an excellent deal on trucks that would surely expand your customer delivery base? Or if you have an opportunity to buy inventory at a steep discount? With access to a business line of credit, a business could be in prime position to take advantage of these opportunities.
Getting a line of credit for your small business is one of the smartest financing moves you could make as an entrepreneur.
A business line of credit gives you the convenience and flexibility you need to address day-to-day needs, including emergencies and even unexpected setbacks.
If a piece of equipment breaks down or you suddenly need to fill a bigger-than-expected order from a customer, a business line of credit allows you to respond quickly. You wouldn’t have to scramble for funds. You can stay focused on running your business and stay afloat when unforeseen events hit.
There are ways to make the most of a business line of credit. Here are some tips:
1. Keep your account up-to-date
Perhaps the number one advantage of business credit line is flexibility. You could even choose to not withdraw anything for extended periods.
But with most financing companies, it’s also smart to maintain your account up-to-date. It’s not unusual for a business owner to sign up, draw and then repay funds on a credit line and do nothing for a few weeks or maybe a couple of months.
But if you don’t use a credit line for longer periods, say, a year, and you haven’t updated your account information, the lender may have to again ask you to submit updated information about your business.
That’s because the state of your business may have changed. These could be positive changes that could actually lead to an increase in your credit line. But, of course, there could also be negative trends.
It’s important that the account is active. You can take a draw and let it ride out the six months on weekly installments. If you haven’t been updating your account, your lending partner will likely need to reassess your business before extending a new credit line mainly because the financing you’re getting is tied to your cashflow.
You shouldn’t withdraw funds if you don’t really need to. But one thing to keep in mind: utilizing your credit line regularly may improve your ability to get a credit line increase in the future.
In fact, consistent funding history builds more history allowing underwriters to potentially auto-approve funding requests and increase credit lines.
2. Provide a bank connection
One of the best ways to give a lender an up-to-date view of your business finances is to provide a connection to your bank account.
This allows lenders to view your bank data, and potentially even provide an increase when they see increased financial strength in your business. With such visibility, your account would remain active, and you might even be able to draw the funds you need without having to submit new information.
3. Watch out for liens
A lien is is a legal claim on your business or property placed by a lender as a form of security for lending you money. A lien would be the tool used by a lender to make the security interest public. A “security interest” is defined as “an interest in personal property or fixtures which secures payment or performance of an obligation.”
This is common practice in financing arrangements.
But liens could have implications on your ability to get financing to run your business.
For one thing, a lien on your business could mean a cap on the business line of credit a lender is willing to offer. For example, instead of a $50,000 credit line, a lender may decide to offer only $20,000 because of another financing firm’s lien on the business.
Here’s a key point to remember: sometimes business owners aren’t even aware of the liens placed on their business or property. I’ve come across business owners with liens from lenders they have never funded with, and even from lenders who are now out of business. The Uniform Commercial Code (UCC) requires a lender to have authorization from their customer prior to filing the lien. Generally speaking, the customer provides this authorization in financing agreement contracts signed prior to funding.
It pays to be a savvy business borrower. You should check with a lender and ask at what point they’ll file a lien, and if they will provide funding once they’ve filed, or if they will require confirmation from the Secretary of State. Each lien filing must be filed in the borrower’s state of incorporation and every state’s Secretary of State is set up differently, which can impact the time it takes to process the lien filing.
When you end a relationship with a lender, you should always make sure they terminate their lien. It’s also a good practice to ask for a copy of the lien termination, a UCC3, for your own records.
4. Watch out for negative bank events
“Non-sufficient funds” or NSF or “overdraft” are some of the bank account notices that are referred to as “negative bank events.” You should try your best to avoid them because these could have an impact on the type of financing you could have access to.
On the other hand, a healthy bank account is usually a positive sign for a lender.
Remember it’s not always about the amount of money you have in your account or the strength of your sales, it’s how you manage your money.
Clients who might not have the strongest sales or income may be able to demonstrate through bank data that they are able to manage their finances very well. They generally don’t have overdraft or NSF notices. Every month, they end on a relatively high balance for their income. That’s something that reflects positively on their business and ability to manage their finances.
A business line of credit gives you the flexibility to deal with unexpected twists and turns in running your business. Managing your finances wisely, while keeping your credit line account information updated, is the best way to maximize this type of financing.
Mistakes to Avoid With a Line of Credit
While this type of business loan may sound like the perfect fix for just about any cash flow problem, it’s easy to slip into bad habits or make poor judgment calls. To make a business credit line work for you, be careful not to fall victim to these financial mistakes:
Waiting until the last minute to apply
Missing out on potential “upgrades” after improving your credit score
Neglecting to ask if the lender reserves the right to “call” the loan
Maxing out the credit line
It’s essential to be thorough when looking for a lender and careful when establishing a payment structure so that you don’t wind up in a tenuous financial situation. With a business line of credit in place, you don’t have to worry about your company going under due to unexpected expenses or a particularly slow season. Be smart about how you use the money available to you, and your company will remain lucrative even during tough times.
Funds available on demand with a business line of credit. Enjoy peace of mind by having money available for any business expense. Draw funds with a click of a button.
- Only pay for what you use
- No fees to open or maintain your line. No prepayment fees, monthly maintenance fees, or account closure fees.
- Access to a revolving line
- Draw as little or as much as you want from your available credit. Your credit line replenishes as you make repayments.
- Financing that grows with you
We support your business growth by getting you the right credit line for your business size at any stage.
Highlight #1 - Apply Online
Provide us basic information about your business and get approved in as fast as 20 minutes.
Highlight #2 - Draw Funds
Use your online dashboard to request funds, and get cash in your bank account within hours.
Highlight #3 - Make Repayments
Pay back each draw with fixed monthly or weekly payments over 6 or 12 months.
Highlight #4 - Access More Funds
As you pay off your balance, your available credit is automatically replenished.
6+ months in business
$100,000 in revenue
What you need to apply
Basic details about you and your business
Bank connection or 3 months most recent bank statements
We've partnered with the countries top business line of credit lender. We've also arraigned special pricing for our clients. LVRG cannot make it any easier for you to access the capital your business needs to thrive and grow. Business lines of credit up to $250,000, rates as low as 4.8% and approvlas in 20 minutes. Click below to apply, without impacting your credit score!
So, who's ready to GROW their business?
REFERENCES: BLUEVINE CAPITAL - How To Maximize a Line of Credit for Business