A small business line of credit is an effective strategy for achieving ongoing financial goals for your company, like ironing out seasonal cash flow fluctuations or purchasing new inventory. But before you start applying and signing on the dotted line, it’s smart to perform your due diligence and find the best line of credit available for your business’s needs. Follow these tips to choose the best lender possible. Step 1: Compare Business Loan Vs. Line Of Credit Before applying for a business line of credit, make sure it’s the best type of financing for you. The main difference between a business loan vs. a line of credit is the way you receive the funds. With a loan, you get a one-time lump sum of cash, then you make payments until the balance (plus interest) is repaid. With a small business line of credit, you can draw funds as you need them. As you repay your balance, you can borrow more again. There are many benefits of a business line of credit. A big one is if you need to consistently order inventory. You may receive a purchase order but not get paid by your customer until the items are delivered. With a line of credit, you can borrow exactly how much you need to buy the products, then pay off your balance as soon as your customer pays the invoice. Step 2: Identify Desired Amount For Small Business Line Of Credit Before you start applying for a line of credit for your business, figure out how much funding you’d like to access. In order to do this, you need a clear idea of how you plan to use the money. In addition to inventory financing, a line of credit may also be used for things like: Emergency expenses (like broken equipment) Seasonal cash flow ebbs and flows (like an ice cream shop or a Christmas-centric business) New growth opportunities (like launching an additional location) Payroll for new employees You can also use a business line of credit calculator to estimate your monthly payments for different amounts. Once you’ve determined your target funding amount, you can focus on lenders that can accommodate those needs. Step 3: Determine Your Funding Timeline Another important consideration when applying for a small business line of credit is the funding timeline. Not all lenders are equipped to evaluate applications and initiate the funding process on the same schedule. If you’re looking for quick financing so you can fulfill a large purchase order, you need to narrow your search to lenders who offer fast funding times. On the other hand, if you’re preparing for a slow season in the coming months, you might not need access to a line of credit so quickly. Lendio’s network of lenders typically connects borrowers with their line of credit within one to two weeks. No matter what lender you choose, understand expectations up front so you can plan accordingly. Step 4: Consider A Secured Vs. Unsecured Line Of Credit There are two different types of lines of credit available to small businesses: secured and unsecured. A secured line of credit requires you to pledge some type of asset to serve as collateral for the borrowed funds. It might be inventory, equipment, or money in a business bank account. Those assets can be seized in the event the business defaults on the loan. But on the plus sides, a secured LOC also usually comes with lower interest rates and higher credit lines. With an unsecured line of credit, you don’t have to use any type of collateral to secure the loan. Expect higher interest rates and potentially lower funding amounts with this option. But the good news is that you’re not at risk of losing those assets if your business can’t pay off its credit line balance. Step 5: Compare Rates And Fees There are costs involved with getting a line of credit for your small business, and it’s important to compare multiple lenders to understand everything included in the loan agreement. One of the biggest costs to consider is your interest rate. This is how much you’re charged as you draw on your credit line. Other potential fees include things like: Origination fees Account maintenance fees Inactivity fees Draw fees Sometimes it can be hard to compare apples to oranges, especially if one credit line offer has a lower interest rate but higher fees. In addition to looking at each fee separately, also consider the line of credit’s APR, or annual percentage rate. This includes all of the fees involved and spreads them out over a year to give you a holistic view of all costs involved. Step 6: Consider The Customer Service Experience Customer service shouldn’t be forgotten when comparing lenders. Not only do you want excellent service now, you may also have additional financing needs later on. For instance, if you currently own one mechanic shop and have the opportunity to buy out a nearby competitor, an existing lender relationship could be helpful in quickly closing a deal. Working with a partner like Lendio also helps because you have a financing manager to answer questions about all the offers that come in so you can truly make the best decision. Bottom Line Many small businesses can benefit from a line of credit, either to prepare for emergencies or to jump on new opportunities. Ready to apply? Apply for a small business loan with Lendio. Frequently Asked Questions What credit score is needed for a business line of credit? The minimum credit score needed for a business line of credit depends on the lender and the history of your business. It’s possible to get a business line of credit with bad credit, but you may need to secure the financing with some type of collateral. If your small business is established with a credit history of its own, you may qualify for a business line of credit with no credit check on your personal score. Is it difficult to get a business line of credit? How difficult it is to get a business line of credit depends on the history of your company. Most lenders require you to be in business for at least 6 months with an annual revenue of $50,000 or more. Consequently, it can be difficult to get a business line of credit with no revenue. Which bank is best for a business loan? There’s no single right answer for which bank is best for a business loan. You might get several different offers depending on the lender and your business needs. Compare several different options by looking at interest rates, fees, funding times, and credit line amounts. Is line of credit a good idea for a small business? A line of credit can be a good idea for a small business as long as you have a clear plan for using the funds and paying back your balance. Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.