If you’re a small business owner, chances are there’s one headache that haunts you often—the cash flow headache.
“It costs money to make money” isn’t just a term used to get a few laughs at the round table, it’s a statement of fact. Even the largest companies in the world access outside transactional funding to help support their business needs.
But what happens when a company reaches a point where its business checking account begins to sink as its growth-oriented business expenses mount? Many look to small business loans and banking products known as lines of credit. Read on to learn more about business credit lines, when they come in handy, how to access them, and alternatives to consider.
What is a business credit line?
Business credit lines have many names: small business line of credit, revolving line of credit, or simply LOC. No matter what you call them, they’re all the same thing. They’re a lending product that offers access to business financing when businesses need it.
These revolving lines of credit work much like business credit cards. As you use it, the balance you owe to your lender grows. As you make your monthly payments, that balance shrinks. Moreover, there’s typically no prepayment penalty, making it possible to access working capital and pay it off completely as your company’s finances allow. All business lines of credit fall into one of two categories:
- Secured line of credit: A secured line of credit is attached to a form of security. This security may be real estate, equipment, or other assets that offset the risk for the lender should the company fail to meet its repayment obligations.
- Unsecured line of credit: An unsecured line of credit is one that’s only secured by the borrower’s promise to pay the money back. The lender has no right to property should the borrower fail to meet their repayment obligations.
Term loan vs. credit line
Business loans and lines of credit may seem similar, but there are significant differences between the two. The most important differences to consider include:
- Repayment terms: You’ll repay term loans over a predetermined amount of time, typically between 36 and 72 months. At that point, the loan will be closed and marked as paid off. Even when you pay off a credit line, the line stays open and you continue to have access to capital.
- Flexibility: Term loans are given in one lump sum, typically to pay for a specific item. You can access the available credit in a revolving credit line any time you need to.
- Cost: Term loans are typically less expensive than credit lines.
Pros and cons of taking out a business credit line
At first glance, a business line of credit may seem like the perfect option for your business. However, it’s important to consider the pros and cons before you make any financial decisions.
- Repayment: You’re able to pay your credit line off over time with manageable monthly payments.
- Options: Between traditional lenders and countless online lenders, you have a multitude of options to choose from if your business qualifies for a line of credit.
- Capital: Lines of credit give you access to capital when you need it. As long as you don’t go over your credit limit, you can access any amount of money you need at any given time.
- The cost: Business credit lines can be expensive. They typically come with higher interest rates than term loans alongside annual fees, origination fees, maintenance fees, draw fees, and other additional fees. Be sure to read fee disclosures carefully and seek options with lower interest rates and fees.
- Credit approval: Your business will need a good credit score to meet eligibility requirements. If not, you may have to make a personal guarantee using your personal credit score.
- Not designed for lump sum purchases: If you need to make a large one-time purchase, a term loan is typically a better fit.
- Collateral: You may be required to offer real estate or other assets as collateral to access the funding you need.
Credit lines for small businesses and startups
New businesses often need access to capital and may choose a credit line over a startup business loan. If that’s your situation, consider the following.
When a credit line makes sense
If you’re considering a credit line, it must make sense in the situation you plan to use the money for. Credit lines are designed to give you continual access to working capital. When you use it wisely, you’ll only access the funds you need and pay the debt off in the short term.
Yet, this is only fitting in some scenarios. For example, if you’ve recently entered into an agreement to produce a product and won’t be paid until the end of production, it may make sense to use a revolving credit line to cover the costs of production until you receive compensation.
When a credit line doesn't make sense
Although a business line of credit may seem like the perfect option if you need funding, it can be toxic to the development of your business if used improperly. In some cases, business lines of credit just don’t make sense. Some examples include:
- If you’re making a large, one-time purchase, you’ll likely be better served with a term loan that offers lower interest rates and fees as well as fixed monthly payments for a predetermined period of time.
- If you don’t have great credit and can’t access a line of credit with reasonable rates and fees, it’s best to exhaust all other options before choosing to open a LOC.
- If you simply don’t qualify for a business line of credit, there’s no reason to stress yourself out over trying to get one. There are other options to choose from.
Where to start
If you’ve decided that a credit line is right for you, you’ll want to get prepared before you start the application process. Get the following in order before you apply:
- Tax returns: The lender may want to look at your business and personal tax returns for the past three years as part of the qualifying process.
- Bank statements: Your lender will likely want to take a look at your bank account to ensure you can afford the loan.
- Articles of incorporation: The lender will use your articles of incorporation to verify the age and legitimacy of your business.
- Collateral documents: You may need to provide documents related to real estate or other collateral you plan to use. Be sure to have these handy.
How to get approved
There are a few things you can do to improve your chances of approval. Some of the best options include:
- Work on your personal credit score: Credit approval largely depends on your credit history. If you have no business credit score and your personal credit isn’t perfect, it may be wise to work on your creditworthiness before accessing a business line of credit. Also, consider getting a prepaid credit card for business to work on your business credit score in the process.
- Be ready to offer collateral: Offering collateral takes risk off the lender’s shoulders, improving your chances of approval.
- Apply for the right offers: Considering your credit score and assets, apply for products you’re likely to be approved for. If you’re not sure of a specific loan’s approval requirements, perform an online search to determine your chances before you apply.
Also, keep in mind that this isn’t your only option. If you don’t have the best credit or plenty of collateral to offer, consider working with Ramp and taking advantage of their sales-based underwriting.
If you’re looking for financing options for your small business and believe a line of credit is the way to go, consider one of the providers below.
OnDeck is a popular online lender that’s known for reasonable repayment terms and reliable access to funding. Their line of credit products come with interest rates starting at 29.9% and are typically available to borrowers with a 625 or higher credit score.
With OnDeck, you’ll be able to borrow between $6,000 and $100,000. Every time you access money, you’ll have 12 months to pay the funding off, and the 12-month clock restarts if you tap into the line of credit as you’re paying off a balance.
Finally, BlueVine is an impressive offering, largely because of the low-interest rates the company offers. Rates start at just 6.2% for the most qualified borrowers. However, you don’t have to have perfect credit to qualify either. The minimum credit score to qualify is just 625.
However, if you’re just getting started, you’ll have a hard time getting approved. In fact, you’ll have to be in business for at least 24 months to qualify.
Credit lines for larger enterprise companies
If you’re leading a larger enterprise, your needs will differ from those of small business owners. However, a business line of credit may still fit the bill. Read on to find out if a LOC is for you and how to get your hands on one if it is.
When a credit line makes sense
As an enterprise company, you likely serve large clients. But, that comes with challenges. There are significant costs associated with providing products and services to large clients, and in many cases, those products and services are provided on trade credit lines. That means it may be months or even years before your company receives compensation.
This is when credit lines come in handy.
Moreover, you may use a credit line to access base materials at low, bulk prices, reducing your costs of goods and increasing your margins. However, before taking advantage of this opportunity, be sure to consider the cost of interest and the fees associated with the credit line to ensure a cost savings truly exists.
When a credit line doesn't make sense
As is the case for small businesses, there are plenty of situations in which a line of credit simply doesn’t make sense for enterprise-level companies. Some of those instances include:
- If your company can cover costs without detriment to operations, avoid high-cost credit lines to keep more of your profits in-house.
- Regardless of the size of your company, business credit lines aren’t designed for large, one-off purchases. So, avoid using these as financing options for expensive machinery, real estate, or other high-cost assets. There are plenty of lower-cost ways to access the funding you need for these assets.
Where to start
As an enterprise-level company, chances are you’ve got the business credit score needed to qualify for a line of credit, but it’s always a good idea to make sure. So, start by checking your company’s credit to see where you stand.
Next, start getting all of your documents in order. You’ll likely need:
- Articles of incorporation
- Profit and loss statements for up to the past three years
- Tax returns
- Bank statements
Once you have these in hand, it’s time to move forward with your application.
How to get approved
As is the case for startups and small businesses, there are a few things enterprise-level companies can do to improve their chances of getting approved for a business line of credit. Some of the most effective opportunities include:
- Pay down other debts. Lenders often look at your credit utilization and debt as a percentage of revenue. When you pay down outstanding debts, you have a better chance of getting approved for new credit.
- Be prepared to offer collateral. After all, if you’re willing to take some risk off the lender’s shoulders, they’re more likely to loan you money.
If you’re considering a business line of credit for your enterprise-level business, one of the following options may be a good fit for you.
Bank of America
Bank of America offers a wide range of business lines of credit products, including secured and unsecured options. This is a compelling choice for enterprise-level companies because the company lets you borrow up to $2 million while many other options cap credit lines at just $100,000.
You’ll have to be in business for at least two years to qualify, which is fine for enterprise-level companies but may be an impossible requirement to meet for startups.
PNC Bank is another compelling option with a bank that’s well-respected across the United States. Moreover, the bank offers credit limits as high as $3 million, which is a decent amount even for an enterprise-level company.
There is a catch to such a high credit limit though. All PNC Bank lines of credit must be secured by some form of collateral. So, if you’re not willing to put valuable assets on the line to access the funding you need, you’ll likely need to look to another provider.
Wells Fargo Prime Line of Credit
Finally, the Wells Fargo Prime Line of Credit is only available to companies with a minimum of $2 million in annual sales. This is an attractive option because rates start at just prime plus 0.5% with a 5% floor. Moreover, you’ll have access to rewards and a credit card that lets you make purchases directly from your LOC’s available credit.
Ramp’s alternative solution to credit lines
Although a line of credit may be appealing, take a look at Ramp before you apply. Ramp is an innovative financing option that gives you access to the spending power you need with a charge card instead of a credit card, alongside a wide range of other features.
It’s perfect for small and enterprise businesses that need a way to empower their employees to spend on their company’s behalf while automatically tracking purchases and enacting spend controls.
The best part is, there are no fees for the service. You won’t pay interest, origination fees, monthly maintenance fees, or any other fee. Moreover, if you need access to loans that can carry over month-to-month, Ramp can team you up with their vetted lending partners to help ensure you keep your expenses low. Visit Ramp today to learn more.
You may be able to get a business line of credit with a credit score as low as 580. However, the fees on these products are typically high, and they will usually require collateral as security. You can access better terms and fees with a 680 credit score or above.
There is no set interest rate for business lines of credit. Rates typically range from 4% to 60% and can be far higher for borrowers with tattered credit.
In some cases, you can access a business line of credit in as little as one business day.