A business line of credit can be a great alternative to a traditional business loan. This type of loan is often more flexible in terms of how the funds can be used and repayment requirements, which makes them a popular option.
But what are these loans, and how can you get them? The following is an overview of how to get a business line of credit as well as associated pros and cons.
What Is a Business Line of Credit?
A business line of credit is a highly flexible loan that is offered by both banks and credit unions for businesses of all sizes. The amount that can be borrowed varies, but is typically between $1,000 and $250,000. They can be used for many different purposes including:
- Operating capital
- Bridging gaps in seasonal cash flow
- Other business needs
Business lines of credit are different from traditional loans in how the money is distributed and repaid. With a traditional loan, you receive a lump sum for the full loan amount and then make monthly payments.
A business line of credit, in comparison, operates more like a credit card, and you can withdraw money as you need it. It is a revolving line of credit that you can use over and over again.
How Does a Business Line of Credit Work?
With a business line of credit, you are approved for a credit limit that you can draw from as needed. When you withdraw money, you have the option of making interest-only payments until the draw period ends. You can then replenish your credit limit by repaying the money you borrowed.
The draw period may be for up to 10 years. When it ends, a balloon payment for the full amount borrowed will be due. Interest rates depend on the lender, and they can be either variable or fixed.
A business line of credit can also be secured or unsecured. Unsecured loans usually have higher interest rates, and they also require higher credit scores and other factors to qualify.
How Do You Qualify for a Business Line of Credit?
The requirements to qualify for a business line of credit vary depending on the lender. Be sure to find out what information your lender needs before you visit. If you need to gather additional documentation after applying, it could cause a delay in the processing of your application.
In general, there are three things that lenders review when deciding to approve a line of credit for a business: credit history, financial statements, and how long the business has been operating.
Your business’s credit score will be checked to see if it has a history of on-time payments. If your business is new, your personal credit score will be used instead.
It’s also possible that your personal credit score will be checked even if your business is established. Some lenders may require a personal guarantee that the debt will be repaid in the event of a business failure.
Business financial statements
Your business’s financial statements will be required to show that it has good revenue and cash flow. This helps to ensure that the money that was borrowed will be repaid. Lenders look for stability and that your business has been growing over time.
Time in business
Lenders prefer to open lines of credit for businesses that are at least two years old. It may still be possible to qualify as a startup, but a personal guarantee may be required.
What Are the Pros of a Business Line of Credit?
Business lines of credit have a lot of advantages over traditional loans to consider. For many businesses, they are important lifelines that help them continue to operate when business is slow.
They are highly flexible
A business line of credit can be used for many purposes. A traditional business loan, on the other hand, can typically only be used for the purpose stated on the loan application.
Lower interest rates than credit cards
The interest rates for a business line of credit are usually much lower than credit cards, which makes them ideal for short-term financing.
You can make interest-only payments during the draw period
You have the option of making interest-only payments on the money you borrow during the draw period. This can be a big advantage for startups with cash flow challenges.
It can improve cash flow when business is slow
For businesses that experience seasonal fluctuations, a business line of credit can be used to fill in the cash flow gaps. It can be used for payroll, utilities, inventory, and other expenses.
It can help build your business’s credit
If your business is new, a business line of credit can help your company build its credit history. This will help you qualify for future business loans.
What Are the Cons of a Business Line of Credit?
Business lines of credit do have some significant negatives to consider. It’s important to ask your lender about these things before you apply so there won’t be any surprises.
There may be maintenance fees
Some lenders charge maintenance fees for the business lines of credit they offer. These fees may be negotiable.
You may have to put down collateral
Depending on the lender, you may be required to put down collateral. This could be a problem for startups with limited assets.
Interest rates may be higher than a business loan
You will pay more in interest than you would with a traditional business loan. Loans that are offered through the Small Business Administration, for example, have interest rates that are lower than most business financing options.
A balloon payment may be required when the draw period ends
If you make interest-only payments during the draw period, a balloon payment for the full amount that was borrowed may be due when the draw period ends.
How to Get a Business Line of Credit With Wasatch Peaks
Wasatch Peaks Credit Union offers lines of credit that are ideal for many business needs. One of our financial advisors can assist you with any questions you may have and with the application process.
Click below for more information on our business lines of credit and how you can apply.