Everything You Need to Know About a Business Credit Line

BusinessBlogsBusiness owners, are just like all of us and they too can fall into the same trap of making hasty decisions when they’re stressed. Borrowing money is one situation that needs a cool calm clear head, and plenty of time to review all the options available, to ensure a good outcome for the borrower. There are lots of different finance products for business including a line of credit.

Here are some of the most common questions business owners ask about this form of finance:

1. What exactly is a business line of credit?

If you don’t know the answer to this question, you shouldn’t be completing an application just yet. There are some things you need to learn.

In the most basic terms, a business line of credit provides access to revolving capital, much the same as a credit card.

Additionally, you aren’t required to take all the money at once, meaning that you only pay interest on the funds that you actually withdrawal.

2. What is required in order to apply for a business line of credit?

You don’t need much to apply, but there are some details that you’ll want to have in hand as you get started.

First things first, your company must be a minimum of six months old. Along with this, most lenders require that you have a minimum annual revenue, typically in the $50,000 range.

The application itself will ask for additional information, such as your name, company location, and possibly your intended use of the funds.

3. What is the minimum and maximum loan amount?

This depends on a variety of factors, including the lender that you’re doing business with.

Most lenders have a minimum of $10,000 with a maximum of $1 million or more.

How much you qualify for depends on the age of your business, annual revenue, credit score, and other debt (and that’s just the start).

The best thing you can do is complete an application, and then work closely with your lender to determine how much money you can access.

4. What is a typical interest rate on a business credit line?

Just the same as any type of loan or a credit card, this depends on more than one factor.

A typical range would be 7 to 25 percent, with your goal to secure the lowest rate possible.

If you have a good credit score, you can expect the lower end of the interest range. Conversely, if you have average or poor credit, don’t be surprised if your rate creeps up higher.

5. What are the primary benefits of a business line of credit?

This is something you definitely want to look into before applying, as you want to make sure the benefits will work in your favor.

Here are some of the top benefits:

  • You only pay interest on the funds drawn
  • You have access to capital when you need it, but you don’t necessarily have to use it
  • You can apply even if you have bad credit
  • You can use it for a variety of business expenses, such as to pay bills during your “down season”

These are not the only benefits of a business credit line, but they’re among the most important. It’s details like these that often push a business owner toward this option, as opposed to others.

6. Are there any potential pitfalls of a business line of credit?

In a perfect world, you would never have to worry about drawbacks of a business credit line. Unfortunately, there are a few things that you need to know:

  • A low credit score will mean a higher interest rate
  • You may have to put up collateral in order to receive an approval (thus putting it at risk if you default)
  • You may be required to provide updated documents when you take money from your line of credit

While these details can be bothersome, it may not be reason enough to forget about a business credit line altogether. You need to decide if the pros outweigh the cons, or vice versa.

Conclusion

There is a lot to learn about applying for and using a business credit line. By answering these questions in great detail, you should have a better understanding of what this can do for your company and its financial situation.

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