Mostly, every small business owner will encounter situations where they need some quick access to extra capital to help their small business grow. Traditionally, one of the most popular vehicles for handling short-term cash flow needs has been what’s called a “business line of credit.” These unexpected situations can arise randomly and potentially sideline even the strongest of businesses. That’s why the need for additional cash flow is normal and to be expected.
A business line of credit can often times be one of the best options available for business owners. The line of credit gives you capital to draw upon to meet a variety of business needs. And the financial cushion for the fixed amount allows you to continue operating your business while meeting any cash flow gaps.
We will be taking a look at business lines of credit today and explain what you need to know.
Business Line of Credit
Definition: A line of credit is an amount of money provided by a lender, which an individual can spend at will, either by credit or check, provided they pay some amount back each month.
This fixed amount of money can be used day-to-day according to the business owners need for cash. Lines of credit are designed to help small businesses finance short-term working capital needs.
A few examples:
- Making Payroll
- Purchasing Inventory
- Repairing Equipment
What They Are
As a small business owner, it is nice to have access to cash when you need it. A business line of credit is quite similar to a business credit card. This type of financing is a great option to help offset the “ups and downs” with business. Basically, a line of credit provides the helping hand to a solid business with a proven ability to repay.
There are two main types of business credit lines:
- Unsecured Business Line of Credit: This credit line does not require any assets as collateral, which can sometimes be a more attractive offer for business owners. Still, the lack of collateral will mean more potential risk for lenders. So to get an unsecured line of credit you will need a strong credit score and a positive business track record. In addition, unsecured credit lines are usually smaller amounts with slightly higher interest rates.
- Secured Business Line of Credit: For this type of credit line, you must provide some type of collateral to secure the loan. Since the line of credit is a short-term liability, most lenders will typically request short-term assets, such as inventory or accounts receivable. Lenders don’t typically require capital assets, like property or equipment to secure the loan. If the business owner is unable to pay the loan, the lender will assume ownership of any collateral and liquidate them to pay off the balance. In addition, secured credit lines are usually larger amounts with lower interest rates.
How to Qualify
If you have a business without an establish business credit profile or have a low personal credit score, traditional lenders will typically be reluctant to offer a line of credit.
Most lenders prefer offering a line of credit to established companies with a proven track record and revenues to support more flexible financing provided by the credit line.
Generally, most small businesses can qualify for a business line of credit if they have a credit score of 560 or higher. To find out your options and empower your business check out Lendio.
There are a variety of things you will want to have in order to qualify for a line of credit:
- Possession of an open bank account
- Some businesses may be required to prove financial history (up to 2 years)
- Small business’s credit score
- Any collateral requirements
When to Get One
The best to acquire a business line of credit is before your business really needs it. In other words, when your business is doing well. Lenders are much more likely to grant a loan when your business’ cash flow is strong. It will also provide you with a financial cushion for when you actually need the extra capital.
If your business regularly requests funds to cover short-term cash flow expenses, day-to-day business needs, or take advantage of an immediate business opportunity, then applying for a line of credit makes sense.
A business line of credit is a great option to help small businesses grow and expand profits. They provide financial flexibility to cover gaps in normal business operations, and provide security to help maintain business activity.
Make sure you look ahead and forecast your next busy season – it’s best to have some financial flexibility before you really need it.