Business Line of Credit: What it is, the Best Lenders and Making it Work for You

best business line of credit

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If you are a small or medium business owner, the highs and lows of doing business are not strange. A lot of these swings have got to do with the company’s financials or operations.

Seasonal demands for credit caused by time gaps between revenue realization and working capital needs can cause immense challenges in managing cash flow.

Cash fluctuations are more common in start-ups than established businesses. This is because start-ups are often less experienced about the markets or are yet to diversify product lines sufficiently in order to maintain constant positive cash flow.

In some cases, when a young business is unable to meet the cash needs consistently, cash flow problems can force entrepreneurs to close down. This may happen even though the business may be profitable on paper.

If you are a start-up business owner, you should always have sufficient cash on hand to meet the cash flow needs. Savings are an excellent way to bridge this gap. However, savings may not be enough to meet business needs. In such a case, a business line of credit is an excellent solution to meet and manage cash flow needs sustainably.

What is a Business Line of Credit?

Also known as a revolver, a business line of credit is basically a kind of loan that financiers extend to businesses to enable entrepreneurs to meet short term working capital needs. Business owners are able to draw cash for their business needs against a large pool of cash.

Here’s a quick view of the top five business line of credit lenders:

1. Kabbage

Kabbage is an ideal lender for start-ups and less established businesses. You don’t have to meet conventional credit scores. Instead, they rely on other business data to derive your ability to repay.

It offers a line of credit ranging from $ 2,000 to $ 150,000. Given the risk exposure, it is not a surprise that they require repayments to be done within six to 12 months and the APRs range from 32% to 108 %.

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2. Credibly

Credibly is suitable for any businesses that have been operating for at least 6 months. Through Credibly, you can access various forms of working capital financing up to $400,000, including lines of credit, cash advances, and working capital loans.

Credibly charges a 2.5% origination fee which is included in your total payback amount. Once approved and funded, you are expected to repay borrowed money within 6 to 15 months (depending on loan term or advance duration).

To qualify for the facility, you’ll need to be in business for a minimum of six months, have a credit score of at least 500, and have an average of $ 15,000 per month in business deposits. In addition, you’ll need to provide business tax returns for any facilities exceeding $ 100,000.

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3. Ondeck

Ondeck is an excellent platform for upcoming businesses. They offer lines of credit of up to $ 100,000 and APRs range from 13.99% to 63%. This platform is better for businesses that have outgrown the initial stages.

You need to have a good credit score (at least 600) and the business needs to have been in operation for at least one year. Repayments are usually done weekly and borrowed money should be paid back within six months.

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4. LendingClub

Lending Club is a peer to peer lending platform that offers business lines of credit ranging from $5,000 to $300,000 for up to 25 months.

You need to have been in business for at least 24 months, make $75,000 or more in annual revenue. Also, your personal credit score should be at least 620 with no recent black spots such as bankruptcies or tax liens. You need to offer collateral for lines of credit over $100,000.

The APR ranges from 7.77% to 35.11% and they have several applicable fees for the facility such as origination fees, payment by check fee, and late payment fees.

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5. BlueVine

BlueVine is another lender open to newer businesses and small enterprises. You need to have been in business for at least 6 months and have at least $ 100,000 in annual revenue. The minimum credit score they take is a 600 on FICO and you can qualify for a line of credit facility of up to $ 250,000.

The APRs range from 15% to 78%. They don’t charge origination fees and prepayment fees. The loan term is flexible and you can pay back borrowed funds in either fixed weekly or monthly installments for up to 12 months. Your credit score is crucial to your repayment terms. A better credit score qualifies you for a longer repayment.

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How it works

It is also known as revolver since it is revolving credit and you pay interest only for the portion of the money that is borrowed. For instance, if your company has a line of credit of up to $ 50,000 and you draw only $ 5,000, you’ll pay interest on the $ 5,000 only.

Therefore, a line of credit works pretty much like your ordinary credit card. However, it is exclusively on cash terms. Therefore, the APR charges are lower than credit cards and there are no cash advance fees.

The repayment terms vary from one lender to the other but generally range between 6 months and 5 years. Interest rates are affected by a variety of factors. Key among these is your (and your business’) creditworthiness.

Types of Business Lines of Credit

Although there are many brand names and variations, there are two basic types of line of credit products: secured and unsecured facilities. Each comes with its’ set of pros and cons.

1. Secured Business Line of Credit:

In this type, borrowers must provide the lender with collateral for the facility. It may be a short-term asset such as inventory or your accounts receivable.

The collateral secures the facility and if the borrower fails to pay the loan, the lender can seize the assets, liquidize them and use the proceeds to settle the balance.

A secured business line of credit is typically applied and approved for medium to large sums of cash. It attracts lower interest rates due to the existence of collateral.

2. Unsecured Business Line of Credit:

In this kind of loan, borrowers can access the facility without having to put up collateral. These are relationship and character-based facilities, therefore, a strong credit rating and a proven business track record are essential for approval.

Since lenders are exposing themselves to more risk in case of default, by not seeking collateral, they charge higher interest rates and the facilities are normally smaller.

What Are the Benefits and Drawbacks?

Many entrepreneurs, established and developing, agree that a business line of credit is an excellent way to fund short term working capital and operational expenditures needs such as inventory replenishment or payroll payments. This is because this kind of facility has the following benefits:

  • Interest is charged only on the amount borrowed (not the entire limit). Thus, the business pays only for money borrowed and used at a specific period.
  • Money is always available and the facility is flexible, allowing borrowers to repay and redraw frequently often without any penalties or early repayment fees.
  • The credit line is revolving. That means the credit line is replenished each time you pay off your balance.

However, business line of credit has also some drawbacks which include the following:

  • The interest rates are often higher than for business term loans. Moreover, the rates are variable, typically changing at the lender’s discretion.
  • Unlike term loans which are approved for pre-determined purposes and evaluated by both the borrower and lender for viability, business line of credit is a flexible fund. Thus it is vulnerable to abuse and misuse if not properly managed.

Spotting the Best Line of Credit Lenders

The best lenders will not just have the most competitive rates but are transparent on the terms of payment. Also, the product structure will have a good fit with your business needs.

Before you settle for a lender, you should assess the following:

  • The lender’s reputation.
  • The funding limit for your type of business.
  • Turn-around-time for approval.
  • Qualification requirements.
  • Applicable APR and fees.
  • Repayment terms.

As you can see from our listing, some of the best financiers are the non-traditional lenders, such as online lenders. Although banks are a significant source of line of credit facilities, and you can land an excellent deal with your bank, traditional banks often have complex qualification criteria.

Most banks require entrepreneurs to provide:

  • A detailed business plan including clear projections demonstrating the business’ needs and ability to repay.
  • Demonstrate strong financials (often exceeding one year) showing growing revenues and profit margins.
  • A solid management team along with a proven succession plan to cater for any changes in human resource.
  • A robust product line that is able to weather economic swings
  • Demonstrate your competitive edge and how your business can weather onslaughts from the competition.

These requirements are essential for prudent management and lending. However, they are out of reach for many start-ups and SMEs.

In addition, bank approvals for a line of credit facility often take long -Time which many start-ups and SMEs don’t have on their side. Therefore, traditional lenders have steadily lost ground to modern lenders, who have become the preferred source of line of credit facilities.

Nonetheless, before you settle for a lender, you should assess:

  • The lender’s reputation.
  • The funding limit for your type of business.
  • Turn-around-time for approval.
  • Qualification requirements.
  • Applicable APR and fees.
  • Repayment terms.

The best lenders will not just have the most competitive rates but are also transparent on the terms of payment and their product structures will have a good fit with your business.

Qualifying for a Business Line of Credit

As you can see from the review above, most lenders have unique qualification criteria. However, features such as your personal credit score, business history with positive cash flow and revenue are vital and common.

Regarding the credit score, you can register your company’s Federal Employment Identification Number (FEIN) with Dun and Bradstreet, Experian, Equifax and FICO and start building the company’s credit report separately from your personal report.

In terms of documentation, your business financials, bank statements and personal and business tax returns are vital. This article will help you make amends in case you missed to file your tax returns.

What Types of Businesses Should Consider a Line of Credit?

If your company needs a flexible source of financing to manage cash flow pressures, meet unexpected operational expenses or boost working capital, then you should consider a business line of credit.

In addition, your business should be able to meet the lender’s eligibility requirements and be able to repay the advances within a short time. This way, you will save money on the line of credit as compared to a typical term loan.

If your business is new and you are yet to establish a formidable credit history, a short term secured line of credit may be more suitable to meet your cash flow needs.

On the other hand, an established business with a solid financial history can benefit from any type of facility. But you have to spot the right kind of lender, whose terms and interest rates will not in-turn work against the business.

Making the Line of Credit Work for Your Business

Scouting for lenders, applying for a business line of credit, qualifying, getting approved and receiving the facility is quite a journey for any upcoming business and a significant milestone.

However, the funding will mean nothing if it doesn’t work for the business. The flexibility of the facility makes it so handy that you can access the funds whenever you need and use them for almost anything you may want.

Although, there is the danger of overindulging, and the facility may turn into a stumbling block rather than a stepping stone.

You need to know how to apply a business line of credit effectively and make it work for you.

Here’s how:

First, shop for a lender, apply and get approval before you need the facility. Usually, the approval process may take longer than what most platforms advertise. So, you need to get time on your side by shopping and applying way before you are hard pressed for funds.

Also, if you apply when you don’t need the facility, chances are high that your cash flow will be healthy and you have good financials to back up your request. Moreover, your chances of getting approval are high.

Second, limit its use. Limit its use to funding the right kind of business needs. That is short-term operational expenses and business needs such as purchasing short term inventory or financing a marketing campaign.

Avoid utilizing the funds to purchase long-term investments since the interest rates are high. If you are in need of big-ticket purchase, look for an alternative, cost-effective facility.

Third, make payments promptly. Just as you would on your personal credit card, make prompt payments in order to avoid excessive accumulation of interest charges and to leave the facility open in case of an emergency.

You should also adjust payments to reflect the business’ cash flow movements. During peak seasons, adjust to allow larger payments, and during off-peak seasons, reduce payments accordingly.

Fourth, avoid using the facility to meet regular operational expenses. A business line of credit is best used for occasional, often unforeseen expenses. For instance, you can use it to pay the payroll if there’s a delay in accounts receivables.

Once you have received the payments, you should immediately refund the facility and account for the interest. It should not be used to meet expenses regularly. If you do that, chances are high that you’ll complicate the accounting process and you are likely to max-out the facility for a longer period, thereby attracting higher interests.

What if you want to Expand your Business?

If you are looking to expand your business, a revolving line of credit may not be sufficient. To hire more employees, purchase significant inventory, or make a marketing push, a better alternative might be a term loan from Credibility Capital.

You’ll need to have a credit score of at least 680, and the business needs to have generated at least $250,000 in the last 12 months. The interest rate (ranging 8% to 20%) is much lower than that of a line of credit and you may receive an offer for a loan term of up to 36 months, so this affordable low-APR option is also good for refinancing high-interest debt.

In conclusion, managing cash flow in a business can be tricky. This is particularly true for young enterprises. Use this information to learn more about the business line of credit as a viable alternative for your company. You’ll also learn about the best lenders, how to spot them and finally how you can make it work for you.

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