Access Cash When You Need It
A business line of credit is a financial product that allows a business to borrow a specific amount from a lender (banks/Online Lender) on demand. The Business may reduce the line of credit if necessary, up to the maximum amount approved by the lender. The business will pay interest only on the actual amount of the credit facility used, not on the full amount authorized.
A. Business line of credit are often used for short-term funding needs.
B. To cover storage costs or pay for unexpected expenses.
It can also be used to smooth out cash flow fluctuations and take advantage of opportunities as they arise, such as: B. Purchase reduced inventory or invest in new equipment. Business loans are usually fixed interest rates and have terms that vary depending on the lender and the terms of the line of credit. Certain lines of credit may be collateralized. This means that the borrower must post collateral, such as real estate or equipment, to secure the loan. Others may be unsecured, meaning no collateral is required.
To apply for a business loan, businesses are usually required to provide financial information such as tax returns, balance sheets, income statements, and detailed business plans. Lenders use this information to assess a company’s creditworthiness and ability to repay loans. Overall, the Business Line of Credit can be a useful financial tool for businesses that require flexibility and access to capital on demand. However, it is important that companies carefully review the terms of credit facilities and manage borrowing and repayment responsibly to avoid debt.
Line of Credit Details
| MAX. LOAN AMOUNT | LOAN TERM | INTEREST RATES | SPEED |
|---|---|---|---|
| $5K to over $1M | 3 months to 18 months | 7% – 25% | Under 24 hours (in some cases) |
Pros
- Pay interest only on funds withdrawn
- Capital is available when you need it
Cons
- Lenders can post UCC liens
- difficult to qualify
How Do Small Business Line of Credit Work?
A line of credit is similar to a credit card. Your bank or lender will approve a fixed amount of funding (similar to your credit limit) that you can withdraw at your discretion.
Once you have repaid your expenses, you can continue to withdraw funds from your credit facility. This type of financing is also called a revolving line of credit because it can be used again and again.
An example is shown below.
For example, a $50,000 small business line of credit is approved. You decide to withdraw $10,000 and keep the remaining $40,000 in your pool of available funds. After you pay off that $10,000 plus interest, you have $50,000 at your disposal without having to apply for another loan.
Small business revolving line of credit typically do not expire. As long as the lender believes you are a responsible borrower, you can withdraw and repay these funds indefinitely. Saving time and energy is one of the biggest benefits of Business Line of Credit.
Most business line of credit are traditional revolving credit products, but some do not automatically renew after the debt is paid off. Some non-revolving lenders require you to re apply to renew your line of credit. Assuming you’re on good terms with your lender, reapplying should be an easy process.
Business lines of credit may be divided into short-term lines of credit and medium-term lines of credit. The differences are mainly in minimum eligibility, maximum funding amount and interest rate.
The longest lines of credit are usually provided by traditional banks. Medium-term lines of credit and short-term lines of credit are typically found in online lenders. A business line of credit can be collateralized (collateralized by collateral such as inventory or accounts receivable) or uncollateralized (collateralized only by a personal guarantee).
Business Line of Credit vs. Traditional Term Loans
So what is the difference between a business Line of Credit and a traditional term loan?
First of all, business Lines of Credit typically have lower interest rates and lower closing costs than traditional term loans of the same size. But if you miss payments or go over your credit limit, that rate can get pretty high.
Also, In term loan the borrower pays a fixed amount of interest throughout the repayment period, whereas in line of credit the borrower only pays interest on the amount withdraw from the line.
Comparing Small Business Line of Credit with term loan loans, remember that line of credit tend to work better if you have recurring cash flow problems. However, that doesn’t mean you can’t or shouldn’t use the Business term loan to do a specific purchase.
Business Line of Credit vs. Credit Card
Both business lines of credit and business credit cards are forms of “revolving” credit, but there are some important differences to keep in mind.
- Credit cards usually have high interest rates.
- Credit cards incur additional charges for cash advances and wire transfers.
- A credit card typically requires monthly payments, but a business credit line typically does not.
- A line of credit allows access to cash.
Use A Business Line of Credit
The biggest advantage of the Business Line of Credit is its renewable nature. You can withdraw money, redeem it, and withdraw it again.
The small business line of credit can be used for a variety of business purposes, including:
- ongoing operating costs
- Bridging the liquidity gap
- take advantage of unexpected opportunities
- Have cushions ready for emergencies
- Cover seasonal sales decline
- make bigger purchases
This flexibility is what makes business lines of Credit such a valuable loan product for small business owners. If the unforeseen happens, you have money on hand to deal with it.
Who Qualifies for a Small Business Lines of Credit?
Growing and less established companies may qualify for short-term lines of credit, while medium-term lines of credit are more suitable for companies with higher credit ratings and solid financial histories.
The maximum funding amount available, the length of time the line of credit is in place, and the terms of repayment depend on the company’s income, creditworthiness, history, and other factors.
Qualifications for a Business Line of Credit
ANNUAL REVENUE – Over $250K
CREDIT SCORE – 650 or more
TIME IN BUSINESS – At least 1 year
*Based on past Benifyt customers
Applying for a business line of credit can be relatively straightforward, depending on which lender you are affiliated with.
Online business line of credit providers are using technology in the underwriting process to speed up and streamline their applications. These providers typically offer smaller, shorter-term options.
Traditional banks, on the other hand, are more demanding and can take a little longer to raise funds, but offer larger, longer-term lines of credit.
Documents You’ll Need to Apply
- Driver’s license
- Voided business check
- Bank statements
- Credit score
With banks, you may also need to provide the following:
- Balance sheet
- Profit & loss statements
- Business tax returns
- Personal tax returns
A business Line of Credit Cost for You?
The basic cost of a business line of credit is very simple: You only pay interest on the cash you draw. Say you have a $50,000 line of credit and use $10,000 from that line of credit to cover your debts while you wait for payment from a customer. If your interest rate is 11%, you’ll pay back $10,000 (or $1,000 plus $550 in interest).
When it pays off, you can withdraw up to $50,000 and pay interest only on what you owe at any given time.
Is a Business Line of Credit Suitable for You?
Business lines of Credit are one of the most flexible financing options. Even if you don’t need quick funding, having a line of credit for quick funding can back you up. In reality, the cost of the line of credit can be relatively low if you pay back what you use quickly. For all these reasons, our recommendation is the line of credit to all small-mid sized business owners needing short- to medium-term funding.
