In recent years, a business line of credit has been much more difficult to come by. However, this landscape is just now beginning to change. After the financial crisis in 2008, it’s been a tough road for small businesses to secure the capital they need to grow. With the recent economic uptick, lenders and businesses are more optimistic about the future. As a result, lenders are now approving more loan applications than in the last decade.
I used to be that if you wanted a line of credit for your business the only place to go was the bank. Today, there are number of financial institutions providing funds for businesses. As a result, this has created more competition space, which is always good for customers. With more business line of credit options available than ever before, it has become even more important to do your research to find what program will work best for your use case.
What is a business line of credit?
A business line of credit is revolving credit made available to businesses to use any way they see fit. Unlike other loan types, with a business line of credit the borrower only pays interest on the funds used. Additionally, the borrower can make unlimited drawers on the revolving credit line. That is, as long as the amount is below the credit limit. After the funds have been drawn from the credit line, the borrower must make at least interest payments each month.
This funding source can be extremely flexible for small business owners. Saving the capital they need for when they need it and utilizing only funds necessary in the short-term. Another important aspect to note about a business line of credit is that the funds may be used for any business purpose. There are no limits or restrictions on the use of funds. Therefore, a business owner may use the funds to purchase equipment, materials, inventory, make payroll, or any number of business expenses.
The exact terms of a business line of credit will depend on the program and Institution it is provided by. Working with the bank is obviously an ideal situation, with the most competitive interest rates possible. However, the bank is only approving 1 out of 10 applications for a business line of credit. There are a number of direct lenders now offering a flexible credit line for business owners. The options can seem endless but ultimately it’s important to note what you need the funds for, you need the funds and what your return on investment will be. These factors will determine what is business funding option is best for you.
How does a business line of credit work?
Once you have been approved for a business line of credit, you will be given a credit limit and interest rate. Depending on the restrictions of your particular approval, most business lines of credit will start charging interest 30 days the first draw. Some programs will have a particular date in which interest will be charged regardless of when the funds are withdrawn. It’s also important to note if there are any time restrictions on when the funds should be withdrawn. It could be that you have a 30 to 60 day window to make the first draw.
If you are able to pay back the amount you have withdrawn within the 30 days time frame, typically you will not incur any interest. However, that all depends on the terms you have agreed to. Each month the interest rate will be applied only to the remaining principal. You will be required to pay the interest for each month and you will have the option to pay as much have the principal back as you choose. Keep in mind that there could be other fees associated with the business line of credit. It’s important to review the terms of your agreement and understand all of the implications.
As time goes by and you have made many positive payments on your business line of credit, it’s very likely you’ll be approved for a credit limit increase. It may also be the case that you will be approved for other programs at lower interest rates. Establishing a positive relationship with a lender is an important part of the process. Over time you will have access to more funds at a cheaper rate.
Do I qualify for a business line of credit?
This is probably the most common question, but there is no simple answer. Today’s Financial landscape provides a great number of options and programs. Is program offering it’s on terms and requiring its own qualifications. However, there are some fundamentals that will be taken into account for any business line of credit program.
Unlike most personal loans, business lines of credit approvals are more dependent on a business’s revenue. The first thing any lender will ask you for is the last three to six months business bank statements. You will likely need to provide the most recent tax return as well. This is just the start. What lenders are looking for is the total revenue generated in each month, number of deposits, and negative balances. Any negative ending balance is going to sound very loud alarm bells for any underwriting. It’s important to show consistent revenue. Your business must be capable of handling its bills without going into the red.
Most lenders will require a personal guarantee, which means you’ll need to sign the loan and have your credit reviewed. Although this is not a heavy factor for dealer funding approval, any credit score below 500 will almost never be approved for any funding amount. Any bankruptcies or judgments well almost always disqualify you from a business line of credit. However, it is better to start the application process and have an experienced agent review your file to determine whether or not you will qualify.
At the bare minimum you will need to show that your business does at least $100,000 a year in revenue. However, this is on the extreme low end and your funding amount will likely be very small. Anything below $100,000 a year well almost always be disqualified.
Applying for a business line of credit
Instead of sitting around wondering if you will be approved for a business line of credit, the best thing to do it’s the start the application process. There’s not a lender in the world who will tell you what you are approved for and at what rate without information provided in the application. The sooner you start the application, the sooner you will find out how much you are approved for and under what terms. A business loan expert can then help you chart the waters and decide which program works best for you.
Typically, all it takes is a one-page application along with your financial statements. Once you have submitted this information, the lender will reach out for more information or to provide funding options. Our recommendation is that you apply with a number of financial institutions to compare programs and offerings. When you allow lenders to compete for your business it puts your business at an extreme advantage.
An application for business line of credit will require the owner to provide their social security number. This will be used for a credit analysis. In coordination with this information, your file will be reviewed with the following financial statements: recent business bank statements, recent tax returns, p&l, month to date, and any invoices or accounts receivable information you can provide.
How is a business line of credit different from a term loan?
When you take out a term loan for your business, you will be charged a cost of funds based on the interest rate provided. The payback of the term loan will be predetermined and interest will be applied according those terms. Depending on which business line program you are participating in, there may be a prepayment penalty or it could be that the interest is applied upfront. The term loan is a much more structured option that will work for those who need the funds over a longer period of time. Typically, you will get a business term loan at a lower interest rate, especially if it is backed by some kind of collateral.
A business line of credit is a more flexible solution that provides many positive attributes for business hours. The primary difference is that you will only pay interest on the funds you withdraw and use. With a business line of credit your funding options are much more flexible to meet your needs at any particular time. You also have the option the payback all of the principal each month. If your business fluctuates and has varying needs, this funding option is probably ideal.
However, the term loan will likely provide a higher funding amount. A business line of credit is typically limited to $100,000. Additionally, the interest rate will probably be higher considering the flexibility of a loan. But if you only need the funds for a short time and you’re not looking for a large sum, then you’ll probably find the business line of credit to be much more advantageous.
What do I need to do to get started with a business line of credit?
The first thing to do to get started with a business line of credit is to make sure to do all the research you can. Once you have found the top three lenders that provide the programs you are looking for it would be a good idea to start the application right away. If you need the funds quickly then working with a broker might be a better solution. A broker can look at your profile and documents to help you decide which lender and program to go after. The more information you have about the programs, the better the decision you’ll make.
Once you have your lenders picked out, you’ll need to fill out a one-page application. You’ll also need to provide all of your financial documents. The earlier you start putting this information together the better. Some lenders will even review your financials before initiating a credit pull. If you know your credit score is above 500, the bulk of the decision will be about revenue.
Does Flex Capital offer a business line of credit?
At Flex Capital group we offer a number of business funding programs including a business line of credit and other working capital opportunities. Depending on your need and situation, we will work together to find a solution. We have worked with all types of businesses through varying phases of business.
Once you have submitted an application one of our Representatives will reach out to discuss your options. If there’s anything more we need we will ask for it at that time. It’s best to just start the process and let us figure out what additional information we need.
We love working with small businesses and helping them grow. We look forward to working with you and take your business to the next level.