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Small Business Line of Credit
Summary: A business line of credit is great. It helps business owners get financing in a strategic way. We provide access to lines of credit, which you can use to take advantage of business opportunities you see, or meet other needs you have to help build your business. This article will explain when a business of line credit should be sued.
When is applying for a line of credit better than a traditional term loan?
- Do you need access to capital for short term business expenses
- Do you have a seasonal business and a credit line can bridge your expenses?
- Do you need extra capital to pay for new contracts or projects?
- Do you have a good credit score?
Business lines of credit care a great way for small businesses to pay for short term needs their business has. If you are facing a cash crunch, Delancey Street might be able to help you get a line of credit for your small business. We passionately believe that a business line of credit is a valuable tool for you to get the resources you need to meet your day to day financial obligations. We can help you apply and qualify for a business line of credit which you need to grow your business. You can use the business line of credit we get you for short term loans, and long term financing.
What is a business line of credit?
This is a revolving loan which gives you access to a fixed amount of capital that can be then used to meet your short term needs. It can be used for things like: purchasing inventory, repairing business equipment, financing advertising campaigns, paying for seasonal expenses, and more.
There are two types of business loc’s
- Secured: This is an LOC which requires your business to pledge assets to secure it. A line of credit a short term loan, so lenders will ask for assets like accounts receivable, or something else, which will secure it. Many lenders don’t ask for assets like property or equipment, but some do. If you don’t repay the LOC then the lender will take ownership of the collateral and liquidate it in order to repay your balance.
- Unsecured: This doesn’t require any collaterals. Typically, lenders will ask put a lien and ask for a personal guarantee in order to make sure the loan is repaid. Because there’s no collateral with this type of line of credit, the business needs a strong credit profile and track record. It is common for business interest rates to be much higher than a secured line of credit. Typically unsecured lines of credit are for an amount less than a secured line of credit.
A line of credit is different, yet similar, to a term loan. When a lender looks at your credit score for a term loan they are looking at your credit profile to make a decision about the loan today. For a line of credit, they are looking at your credit performance today in order to make a decision about your creditworthiness at some time in the future when you will tap into the credit line. To a lender, these are very different scenarios.
Term loans involve a fixed amount of money, which the business gets as balloon – once the loan is approved. The borrower makes periodic payments over a period of time. The payments are made on a predetermined schedule until the balance is completely paid off.
Business lines of credit have some additional flexibility that small business loans don’t have. Getting a LOC gives a business the ability to borrow money whenever they need it, repay it, and then do it again, for a period of time. Most lenders will require that an LOC be brought down to zero at some point during the term of the LOC. They are great for paying short term operating expenses, and for other business opportunities that have an “immediate” revenue generating component attached to them.
How does a small business line of credit work
With a business line of credit, you are getting access to an amount of funds which can be used as needed. You get a monthly statement which reflects the amount of credit you’ve used, the amount of interest charged, and when your payment is due. Once repaid, the credit limit is completely available. The payment schedule depends on the lender. It can be weekly, or monthly. In addition to interest, it’s common for there to be an annual fee. If you frequently tap into the LOC, there might also be transaction fees. Usually, for LOC’s under $100,000 – it’s typical for the LOC to behave like a credit card. Some lenders also offer you the option of having the funds deposited into your business bank account via ACH.
When should a business get a LOC
If your expenses are sporadic, and you regularly require access to funds to meet short term needs – then a LOC is a great idea. Here are a few examples of situations where an LOC is a great idea.
Seasonal business: If you have a seasonal business, and experience a short term spike in expenses, then an LOC can help you offset the expenses. The business line of credit can help you cover overhead, and bridge you from one season to the next. The LOC can help you maintain normal business operations.
Finance new expense: It’s common for small businesses to use an LOC to finance a new expense, like a marketing campaign, to attract customers. The LOC funds can be paid back quickly since the new marketing campaign is likely to generate revenue for you.
Any new business without an established credit profile will have a tough time getting a small business line of credit. In this case, it might make sense to get a merchant cash advance who can fund you against future earnings you make.
Who offers small business lines of credit
Most major banks serve small businesses, including commercial banks, community banks, etc. Most small business lenders will only consider established businesses with a positive credit history for lines of credit.
How to apply
Applying for a term loan is difficult than a line of credit. When you apply for a term loan, most lenders want to see your financial records and other documents which show you have a good track record, and are worthy of the loan. Traditional lenders, like banks, require documentation that online lenders might not ask for. Here are some basic documents you might be asked about:
- License credentials
- Tax returns
- Bank statements
- Bank account
- Cash flow, P&L documents, etc
You should be ready to discuss the specifics of your business, why you need the money, how it’ll be used, and when you’ll pay it back. Most lenders will not offer a line of credit to startups, or to cover losses on past mistakes your company made. They may also refuse to give you a small business line of credit to cover expenses which won’t result in immediate profits. You need to demonstrate that you are profitable, and can generate additional revenue because of the LOC. You need to demonstrate your management team understands how to run a business, and will be able to make the periodic payments needed on the LOC.
What you should know before getting a LOC
Before you get an LOC, you should learn about the lender and how they operate. Some lenders charge money for account setups, transactions, and annual fees. Some will require the business to pay down the outstanding LOC balance to $0 at some point during the year. Some lenders might call the LOC at any time due to the market behaving poorly. You should do your best to periodically down the balance, and keep your overall balance low. This shows your lender you are trustworthy. Try to use the LOC to pay for “new” growth opportunities, not for operating losses. Use the LOC as a strategic lever to build something new.