Whether you are a small business or large, even successful ones, need to access cash for their business. Having access to cash can help businesses meet capital needs and thrive in growing a business. Establishing a business line of credit is a way a business owner can receive the funds when they are in need.
What is a Business Line of Credit?
A business line of credit, also known as a revolving or LOC, lets business owners borrow money up to a fixed amount that they can use, repay, and as soon as the money the borrowed money is paid back, the full amount is available again. This method is very different than traditional business loans and is mostly favored by business owners.
A line of credit can cover any unforeseen costs that may arise, such as equipment repairs or other working capital needs. By keeping a line of credit open, you have the access to cash on as an as-needed basis.
Some examples of what you can use a line of credit for include:
- Purchasing inventory or discounted bulk inventory purchases
- Equipment repair
- Financing a marketing campaign
- Hire more staff
- Expanding or relocating your building
- Make purchases to take advantage of opportunities that may arise
- Resolve issues in cash flow
- Emergency funds for unexpected situations
- Paying off high interest credit cards
There are two types of business lines of credit which can be secured or unsecured. Although an unsecured line of credit carries a high borrowing cost, it may be the best option compared to credit cards with high interest or small business loans.
What is an Unsecured Business Line of Credit?
An unsecured line of credit gives owners access to funding without a collateral, but lenders require a strong credit and long business credit history to qualify. This means there is less risk for the business owner but more risk for the lender. Therefore, lenders will charge higher fees and interest rates, issue low credit limits, require short payback terms (meaning big monthly payments), and ask you to sign a personal guarantee.
Loans typically require fixed monthly payments, but you can repay your balance at whichever pace works for you such as paying the full amount each month, the minimum payment or an amount above the minimum payment. It is very similar to a credit card and is very important to make payments on time. This option is very beneficial for businesses who are small or growing because it lets you repay your debt at a flexible schedule that fits your monthly budget.
Unsecured lines of credit are a versatile and an easy solution that will work for any type of business.
What is a Secured Business Line of Credit?
On the other hand, a secured business line of credit requires collateral (including personal assets) to secure the line. In the eyes of a lender, collateral reduces risk and makes you an attractive borrower. If the borrower is not able to repay, the lender can look to take ownership of the collateral.
Below are some examples of what types of assets a lender may accept as collateral:
- Real Estate (business or personal)
- Financial securities
How to Apply for an Unsecured Business Line of Credit?
Each lender has different requirements for when owners are applying for a business line of credit. The following factors are the most considered when you apply for a business line of credit.
- Time in business: requirement of at least one to two years
- Annual business revenue: minimum amount of earnings varies. Financial statements and tax returns may be required
- Credit score: either personal or business credit scores will be taken into consideration
- Credit history: lenders will review your personal and/or business credit reports
- Business license
Lines of credit are good solutions for businesses and is easy to apply with a simple online application, quick turnaround times, and flexibility of funds.
Why Should You Get Unsecured Instead of Secured Lines of Credit?
- If you don’t have enough collateral.
- If you don’t want to pledge your personal and/or business assets.
- You don’t want your assets under valued by a lender.
- You are looking to get a line of credit quickly.
- If your business needs funds to meet short-term capital needs.
- A line of credit might help you establish better business credit.
A business line of credit can be a valuable financial tool to grow your business. The key advantage of a line of credit is that an interest rate is charged on the amount of funds used, not the total available on the line. When looking for an unsecured business line of credit, make sure to compare lenders and see which rate and terms you are more comfortable with.