What is a Business Line of Credit?

A line of credit is a type of small business loan where borrowers get quick access to flexibility for short-term cash needs. A business line of credit works similar to a credit card where you borrow and use cash up to your approved credit limit and can reuse it after paying the principal amount with interest. With a business line of credit, you get access to an ongoing capital to tap into when needed to help manage daily operations, cash flow, or pay bills. A business line of credit makes more sense for small businesses because of its flexibility.

Types of Business Lines of Credit

Essentially, there are four main types of business lines of credit: revolving, non-revolving, secured and unsecured.

  • Revolving Lines of Credit

In a revolving line of credit, you can borrow money to a certain pre-approved limit and add to your balance as and when needed, without having to reapply. After you borrow the money from your credit line, you’ve to make monthly payments to pay off your remaining balance.

  • Non-Revolving Lines of Credit

A non-revolving line of credit works similarly to a revolving line of credit with a difference. In the non-revolving credit line, you have to repay the amount you borrow. Since the credit line is non-revolving, your funds don’t replenish after you make the payments. A small business loan is a common type of non-revolving line of credit. However, if every withdrawal has its own separate terms, your line replenishes when you make payments, and this is regarded as a non-revolving credit line because each withdrawal is independent though your line replenishes.

  • Secured Lines of Credit

A secured line of credit is a business loan that is secured by some kind of collateral or any valuable assets. In order to qualify for secured credit lines, you have to put up collateral for the loan – making it a riskier option for your business. Since these lines are secured by collateral, the lenders typically lower interest rates, flexible terms, and larger credit lines. If you default on the credit line, the lender can seize the possession of the collateral and sell it to recoup the loss.

  • Unsecured Lines of Credit

Unsecured lines of credit are business loans that don’t require any collateral to qualify for the loan. Since these credit lines have no collateral, the lenders typically charge higher interest rates and offer shorter loan terms. Because of the risk involved, such credit lines are offered to those businesses that are well established and have good credit ratings. The lenders compensate for the increased risk by offering lower amounts at higher interest rates.

Difference between Business Lines of Credit and Business Loans

Before deciding to choose a business line of credit or a business loan, understanding the difference between the two can help you make a sensible decision. Here are the key differences between the two options:

  • Flexible Borrowing: With a business loan, you get a lump sum fixed amount of money. With a business line of credit, you can borrow money as much or as little as you need within your approved credit limit.
  • Payment Structure: Business loans are paid in fixed monthly payments until is loan is repaid in full. Lines of credit payments vary based on the amount of money you used.
  • Interest Rates: A business loan has fixed interest rates over the term of the loan. The interest rate of a credit line is tied to the market’s variable rate.

Applying for a Business Line of Credit

Before you apply for a business line of credit, there are certain things you need to have in order for a quick approval.

  • Start Building Credit

Maintaining positive business cash flow is challenging for new businesses. Even when you’re generating revenue, most of the money is typically used to pay for daily operational expenses. This is why building business credit is important for your small business.

  • Find the Best Loan Offer

While reviewing your line of credit options, compare the terms and interest rates of different loan options to find the best loan deal. If you have a poor credit history, consider applying to alternative lenders like Merchant Advisors that provide funding even for borrowers with less than stellar credit or have a little time in business.

  • Demonstrate Positive Cash Flow

In order to qualify for a line of credit, demonstrating positive cash flow will help in approval. Lenders typically take into account your business performance, credit history, and your projected future earnings to determine your business line of credit qualification, the loan amount and the interest rate.

  • Use Credit Cards Sensibly

This is the most important thing you should consider when applying for funding. If you don’t use your credit cards sensibly and max out on them, it will not only hurt your credit score but also affect your ability to borrow money and increase your borrowing cost. That’s not all; you’ll also be paying a significantly higher interest rate on your credit cards as well.

  • Make A Small Start

When you’re just starting out, consider securing a line of credit even it’s smaller than what you really need. Start building your credit by making timely loan payments, and as you progressively start to build your credit, you can qualify for an even larger line of credit in the future while you are growing.

  • Plan for the Future

The best time to apply for a business line of credit is when you have a strong cash flow. Both traditional and alternative lenders typically lend to businesses with strong cash flow, and you are not in a dire need of funding. The best thing about a line of credit is that you don’t have to pay it unless you use the funds. Getting a line of credit when you don’t need it can help you plan for the future for any unexpected expense or opportunity.

Qualifications for Business Line of credit

  • Employer Identification Number (EIN)
  • Personal credit score
  • $25,000+ in Annual Revenue
  • 6 Months of time in Business
  • Business financial statements
  • Bank account details
  • Business and personal tax returns
  • Collateral for a secured line of credit
  • Current debt schedule

Consider Merchant Advisors Lines of Credit

Due to advancements in financial technology, banks are no more your prime source of funding. There are alternative lenders offering a variety of financial products with potentially faster, easier approvals and at more flexible terms than traditional institutions.

Merchant Advisors is one such alternative lender that uses financial technology to provide small businesses with quick access to small business loans and lines of credit. Since 1997, we’ve been serving small business owners across the country.

Unlike a lump sum traditional business loan, a line of credit from Merchant Advisors provides quick access to money with the added flexibility of using as and when needed. If you’re approved for Merchant Advisors’ credit line, you can use the cash for any legitimate business purpose.

Eligibility Criteria for Line of Credit

We don’t have strict eligibility criteria for lines of credit. Instead, we only require you to provide us your basic business information, bank account details, and 3 months of financial statements. That’s it! Once approved you can have the funds in your account within a few business days, and you can use the cash whether for working capital or to cover an unexpected emergency.

Small Business Financing News │ Merchant Advisors | blog
Business Lines of Credit 101: The Basics
Business Lines of Credit 101: The Basics
Looking for funding to fund your small business? The road ahead is full of twists and turns because it does require a lot of time and research to locate the best funding program that suits your business. Due to theRead more
Learn about the basics of business lines of credit to help you understand its types, how it works, the qualification and how it differs from business loans.
Merchant Advisors
Merchant Advisors