The Plain-English Guide to a Business Line of Credit | Sales

So, you need some funds for your startup. But which type of financing is right for you and your business? A business line of credit is an excellent option for those looking for flexibility and greater control over their funds.

It’s also an important way to build business credit. The NSBA Small Business Access to Capital Study found 20% of small business loans are denied due to business credit — and 46% of all small businesses use personal credit cards to finance their operations. So, it’s never been more crucial for you to build good business credit early.

Financial institutions will look more favorably on a business that has established business credit when determining interest rates, how much funding they will extend to you, and repayment terms. Starting with a business line of credit will not only improve your credit — it also makes it easier to apply for additional funding in the future.

How does a business line of credit work?

Let’s say you’re the owner of a candle-making company and you have a business line of credit with a $10,000 limit. There’s an upcoming event and you need to make 5,000 candles, so you draw $2,500 from your business line of credit to pay for materials and production costs. You’ll still have access to the remaining $7,500. Once you’ve repaid the $2,500 plus interest you borrowed, you’ll have access to the full $10,000 again.

There are many benefits to a business line of credit:

• It gives you the flexibility to access funds as you need them and can be a great option when paying for everyday company expenses.
• You don’t need an extensive credit history or an outstanding credit score to secure a business line of credit.
• A business line of credit gives you the opportunity to build your credit score.

While there are benefits to a business line of credit, it also comes with its challenges. It’s subject to credit review and annual review, which means your interest rate and credit limit can change based on review findings.

Business lines of credit are also accessible to those who have poor credit scores. However, lenders might offer these riskier clients higher interest rates based on their credit history.

How is a business line of credit different from a term loan?

A business line of credit is different from traditional term loans because it gives you a pool of funds to withdraw from as necessary. A traditional term loan provides a lump sum of money that needs to be repaid within a fixed timeframe.

There are two types of business credit lines you can apply for: secured and unsecured.

What is a secured line of business credit?

A secured line of business credit is backed by either a guarantee or collateral. Examples of collateral include:

• Inventory
• Property (either personal or commercial)
• Equipment

Secured lines of business credit are a great option for established and new businesses. Deciding which type of lender is right for you will depend on how long you’ve been in business, your revenue, and your credit.

If your business has been operating for more than a year and you have strong credit, banks such as Wells Fargo and Bank of America offer lines of credit. Because new businesses might not have extensive credit history or proof of positive financial standing, it can be difficult for them to be approved for business lines of credit from banks. Luckily, online lenders can be a great option if you need funds quickly.

What is an unsecured line of business credit?

An unsecured line of business credit is a line of credit that does not require collateral. Since collateral is not required, you’ll want to ensure you have proof you’ve generated revenue and your personal and business credit are in good standing.

Unsecured lines of credit are a good option if you don’t want to risk your personal or business assets. Keep in mind the interest rates for unsecured lines of business credit are typically higher. This is to offset the risk the lender assumes to provide you with funds.

Business credit cards

You may be wondering: what’s the difference between business credit cards and business lines of credit? Let’s demystify that now. The lender sets a limit on how much money you can borrow — similar to a credit card.

Unlike a business credit card, a business line of credit is a type of revolving credit. This means once you pay back the funds you borrowed — and the interest those funds have accrued — you may draw from the full amount of the line of credit.

How to Apply for a Business Line of Credit

Business line of credit qualifications

If a business line of credit sounds great for your company — there are a few qualifications you need to meet in order to apply. Below are some of the common items you might need when applying for a business line of credit:

• Personal credit score
• Bank account information
• Personal and business tax returns
• Business financial statements
• Information identifying your business — for example, an Employer Identification Number (EIN)

Mistakes to avoid when applying for a business line of credit

• Not having a clear vision of what the funds will be used for – Before applying to a business line of credit, sit down and determine what you’ll use the money for. Having a long-term vision for your business contributes to providers looking on your company more favorably when deciding your credit limit.
• Applying for a line of credit when you’re desperate – Rule of thumb is to apply for a line of credit before you need it. If you apply when your business is growing and you have positive cash flow, you’re more likely to receive financing when the lending firm reviews your financial statements.
• Rushing through the application – It’s important the application is filled out properly. Simple mistakes, such as entering an incorrect identification number, can cause problems. Take your time on the application and be sure to leave contact information — either a phone number or email address — so the bank or lending company can reach you with questions.

Can You Get a Business Line of Credit with Bad Credit?

What is a credit score?

A credit score is the assumed risk a lender adopts when you borrow money from them. This number is calculated by looking at your loan and credit card payment history, length of credit history, types of credit, and total amount owed.

Credit scores range from 300 to 850. And, while the guidelines for a good or bad credit score vary by lender, some ranges are used to evaluate whether or not your credit score is in a good place.

• Great credit score: 740 to 800
• Good credit score: 670 to 739
• Fair credit score: 580 and 669
• Bad credit score: 579 or lower

Will a bad credit score prevent me from securing a line of business credit?

No, but it might be more difficult to obtain a line of credit with an affordable credit limit and interest rate. Luckily, there are ways to improve your credit and providers that work with a variety of different business types and credit situations.

5 Providers for a Business Line of Credit

1. Fundbox

Best for: Businesses that have been open 3+ months. One perk of Fundbox is there are no minimum credit score requirements.
Borrowing limit: Up to $100,000

2. On Deck

Best for: Businesses that need quick access to funds. You can be approved for a business line of credit in as little as 24 hours, but it often takes a few days.
Borrowing limit: Up to $100,000

3. Kabbage

Best for: Businesses with fair to bad credit. There are no minimum credit score requirements and you can get a line of credit quickly — but they will charge higher rates as a result.
Borrowing limit: Up to $250,000

4. BlueVine

Best for: A range of businesses, including those with bad credit. With a quick application process, you can be approved in as little as 12 hours.
Borrowing limit: Up to $250,000

5. Wells Fargo

Best for: Established businesses with good credit. They offer both unsecured and secured business lines of credit.

Borrowing limit: Up to $500,000

A business line of credit is a fantastic way to begin building your business credit and securing funds for your operations. Want to learn more about starting a successful business? Check out these articles on How to Start a Business, Small Business Ideas, Advice from Entrepreneurs, and How to Become an Entrepreneur.