WHAT IS A BUSSINESS LINE OF CREDIT?
While at first glance, a business line of credit might sound similar to a small business loan. However, it is more similar to a small business credit card. The business LOC gives you a revolving credit through which you can access a fixed amount of capital which you can use to perform your desired business operations. Unlike a small business loan, there is no lump sum of disbursement, which you need to return via instalments.
The financing company will give you a fixed amount of credit, and you can withdraw money from that every time you need it. This means that you don’t have to make repayments for the entire credit amount that has been given to you. Rather than that, you have to pay back the money that you have withdrawn from the allowed credit amount. Once you pay back the balance amount, the credit limit is open again for you to withdraw.
WHAT’S THE PRIMARY PURPOSE OF USING A BUSINESS LINE OF CREDIT?
The primary purpose of using a business line of credit is to gain access to short-term funding. You don’t have to take the burden of taking a business loan and the responsibility of repaying the entire amount of it. Using a business LOC, you can set a credit limit, withdraw whatever amount you think is needed and pay that amount periodically. The repayment period could be weekly, monthly or even quarterly, as decided by the financing company.
Business LOC is an excellent choice for small businesses that are looking to manage their cash flow. So, if you need short-term funding and are sure that the money you take as credit will be gained back soon, a business line of credit would be the best option suitable for you.
WHAT ARE THE REQUIREMENTS?
There are two types of lines of credit – secured and unsecured.
SECURED BUSINESS LINE OF CREDIT
In this type of business line of credit, the business owner needs to pledge some asset(s) or collateral to secure the line. However, because the line of credit is a short term liability, the assets can be short-term. Therefore, no capital assets are required in most cases. If the borrower (business owner) cannot repay the line of credit, the financing company (lender) will liquidate the collateral and pay off the balance.
UNSECURED BUSINESS LINE OF CREDIT
While opting for this type, no assets are required to be shown as collateral. Of course, a generic lien and personal guarantee will mostly be asked for. However, the business owner needs to have a high credit profile with a positive track record of business because of the lack of collateral. On top of that, interest rates are usually higher than the secured business line of credit, and the lines of credit are also smaller.
Business Line of Credit (LOC) FAQ’s
Can you keep a certain amount from the approved loan, for future use?
Yes, you can use a certain portion of the approved amount and keep the remaining for future needs and emergencies.
Banks or Online lenders? From where can you get a business line of credit in the most hassle-free way?
You can get business LOC from both. But, getting it from an online lender is easier.
Is a business line of credit similar to a business credit card?
Business LOC is quite similar to a business credit card as both give your business easy access to credit for meeting short-term business needs and offer revolving credit up to a certain limit. Once you repay the borrowed amount, it becomes available to borrow again. But, business credit cards are typically unsecured and offer lower credit limits, whereas a business LOC might be secured with inventory or business property, but offer a much higher credit limit.
Will you be charged only on the amount you used or the entire amount approved?
You will be charged only on the amount used.
What can you use the business line of credit for?
You can use the business line of credit to purchase inventory, meet business expenses and make payments that cannot be done using credit cards like payroll, property lease and clear specific invoices.
What is the approximate interest rate on which online lenders offer a business line of credits?
Typically, the interest rate is anywhere between 5 to 20% or more.
Do you need to put up collateral for getting a business line of credit?
If you are looking for a lower credit limit, you won’t require collateral, but if you are looking for a higher credit limit of $100,000 or more, you might need to put up collateral, that the lender can seize if you fail to make the minimum payments.
How much can you borrow through a business line of credit?
A business line of credit limits mostly ranges from $5,000 to $150,000
How to check your eligibility for a business line of credit?
The primary eligibility criteria to apply for a business LOC are:
- A considerable credit score of both the business and the business owner.
- A stable financial history with profitable business operations for more than 3 months.
- The business should be legal.
- The borrowing enterprise should not be an NGO, charitable institution or trust.
Can you request an increase in the credit line?
Yes, you can. But to do the same, you need to have justifiable reasons before placing a request and up to date financials to show tight cash positions. Also, you need to consider offering additional collateral to get a higher line of credit.
If you think that Invoice Factoring is like taking a loan, you should take a step back and think again.
MERCHANT CASH ADVANCE
The Merchant Cash Advance is taken against the credit/debit card payments that a merchant receives on a daily basis.