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Do you run a small business and face financial challenges during slower seasons?
Seeking funds for growth and expansion?
In need of financial assistance to finance the purchase of inventory?
If any of the situations mentioned apply to you, it could be beneficial for you to explore the advantages of a business line of credit.
What Is a Business Line of Credit (BLOC)?
A business line of credit is a way for businesses to get money when they need it. It's different from a regular loan because it gives them flexibility in how they borrow and pay it back. They can take out money as they need it and only pay interest on what they borrow. This kind of financing is helpful for businesses that have changing money flow or unexpected costs.
How Does a Business Line of Credit Work?
A business line of credit works like a special account that lets a business borrow money up to a set limit. They can take out money whenever they need it, and they only have to pay interest on what they borrow. When they pay back the borrowed money, the credit limit gets filled up again, so they can use it again later.
What Is a Business Line of Credit Used For?
Businesses can use a line of credit for a variety of purposes, such as covering short-term expenses, managing cash flow, financing inventory purchases, or investing in growth opportunities. For example, a business may use a line of credit to pay for unexpected expenses, such as repairs or equipment replacement, or to take advantage of bulk discounts on inventory purchases.
In addition, a line of credit can be used to cover temporary gaps in cash flow, such as when a business is waiting for payments from customers. A business line of credit can provide a flexible and convenient source of funding for businesses to manage their finances more effectively.
Who Is a BLOC Recommended For?
Whether you are a self-employed business owner with irregular expenses or face significant cash flow swings based on the season, a business line of credit is helpful.
Businesses with strong cash flow facing sudden growth can tap into this tool when they need it. However, it’s most practical for business owners with good business and personal credit scores. It’s worth looking into how a business line of credit vs. a loan, to discover which is right for you.
You can think of a line of credit as a financing tool on standby. It’s ready when you need it. But you won’t be forced to take on debt unless you absolutely have to. Here are a few times when this financing tool could come in handy:
- New equipment needs: A business line of credit for equipment can finance new equipment purchases.
- Growth: If your business is growing quickly, you might need to expand your workforce and your office space. A line of credit can help you do both.
- Inventory purchases: If there is a busy season ahead for your business, you may decide to order extra inventory. And a line of credit can support the costs of that decision.
A Real-Life Example of a Business Line of Credit
Let's imagine you have a small bakery business. Sometimes, you need to buy ingredients or equipment, but you may not always have enough money in your bank account at that exact moment. This is where a business line of credit can come in handy.
With a business line of credit, the bank or lender approves you for a certain amount of money, let's say $10,000. Think of it like a safety net for your business. You don't have to use the entire amount all at once, but it's there whenever you need it.
So, when you need to buy new baking equipment that costs $2,000, you can simply use $2,000 from your line of credit. This means you don't have to dip into your personal savings or wait until you have enough money in your business account.
The best part is that you only pay interest on the amount you borrow, not the full credit limit. So, if you borrow $2,000, you only pay interest on that $2,000, not on the remaining $8,000.
Once you've repaid the $2,000, your line of credit is available again for future needs. It's like having a financial safety net that you can rely on whenever your business requires extra funds.
Borrowing Options Sought by Small Businesses - 2017 vs. 2021
Source: Federal Reserve Board Publication, Availability of Credit to Small Businesses, Box 1, Figure C, October 2022. Data from Small Business Credit survey, Federal Reserve Banks
How To Get A Business Line Of Credit: 8 Key Factors
A business line of credit might be the right fit for your business. But you’ll need to qualify before you can tap into this useful financing tool.
Of course, the exact business line of credit requirements varies based on the lender. Plus, the size of the line of credit will impact the requirements. However, here’s what you should keep in mind when determining whether or not your business may qualify for a line of credit.
- Collateral: If seeking a secured line of credit, the lender will seek collateral. This can be in the form of real estate equity, physical inventory, equipment, or accounts receivable.
- Business operating time: Most lenders will want your business to be open for at least 6 months before applying. But you may be able to qualify for a new business line of credit if you don’t meet the six-month mark.
- Personal and business tax returns: These documents provide the necessary proof of your business income.
- Bank account information: Some lenders will require access to your business bank accounts to confirm your financial details.
- Financial statements: These documents offer proof of your business income. These include an income statement that provides information about revenues, expenses, profit and a balance sheet that outlines assets, liabilities and equity. Plus, common economic ratios such as debt-to-equity ratio, debt service coverage ratio, and the fixed charge coverage ratio.
- Identification information: You’ll likely need to provide personally identifying information such as your address or Social Security Number. Additionally, you’ll need to provide your business identification information, including its name, Employer Identification Number, address, and entity type.
- Outstanding debt information: If your business already has debt on its books, it must be disclosed to the lender.
- Guarantees: Many lenders will require a guarantee of the loan from the business owner. With that, you may be on the hook for the loan with your personal assets if the business can’t repay the debt. One type of guarantee issued by a bank is a letter of credit, so you may wish to explore what is a letter of credit.
Where To Apply For a BLOC
There are several options for applying for a business line of credit, including:
- Banks and Credit Unions: Many traditional lenders, such as banks and credit unions, offer business lines of credit. These lenders may require a detailed application process, including financial statements, business plans, and credit checks.
- Online Lenders: There are also many online lenders that offer business lines of credit. These lenders may have a simpler application process and may offer faster approval times than traditional lenders. However, they may also charge higher interest rates or require more frequent repayments.
- Alternative Lenders: Some alternative lenders, such as peer-to-peer lending platforms, may also offer business lines of credit. These lenders may have different eligibility requirements or offer different terms than traditional or online lenders.
Approval Rates for Business Loans, Lines of Credit, and Cash Advances by Lenders - 2021
Source: Ann Marie Wiersch, Barbara J. Lipman, Kim Wilson, Lucas Misera, Clicking for Credit: Experiences of Online Lender Applicants from the Small Business Credit Survey, 08.16.2022, Federal Reserve Bank of Cleveland Publications - Small Business Credit Survey
When seeking the best business line of credit, it's crucial to evaluate various lenders and what they provide in order to identify the most suitable option for your business's requirements and financial status.
Additionally, it's important to read the terms and conditions carefully and understand any fees or penalties associated with the line of credit before accepting an offer.
For businesses seeking rapid financing, Backd presents a remarkable solution with some of the most generous lending limits and adaptable repayment conditions in the market. This lender specializes in offering diverse financial products, including business lines of credit and working capital loans, delivering funds to approved applicants in as short as 24 hours.
Lendzi offers a convenient solution for small businesses in need of accessible funds without undergoing an extensive application process. This credit line is particularly beneficial for businesses with fluctuating income, requiring financial support during slower periods. But all businesses are unique and are subject to approval and review.
Pros And Cons of a Business Line Of Credit
Here's a table comparing the pros and cons of a business line of credit: