Every startup and small business requires working capital to survive and thrive. They say variety is the spice of life, and getting a business loan is spicy too. There can be so many reasons why you need a loan for your small business—from buying new equipment to meeting payroll or expanding to a new location. The best thing is there are different loan options available for your financial needs.
However, there’s no versatile option to fund your business growth especially when it comes to business lines of credit, awkwardly. In order to secure the best credit line, you’ll have to make several applications with different lenders to get the best and affordable loan deal with lower interest rates and desirable repayment terms.
If you need flexible funding for your small business, a line of credit is the best option. Here’s is everything you need to know about what types of lines of credit available, how it works, and how to choose the best one.
Lines of Credit: The Overview
Generally, lines of credit are revolving credit lines where you draw cash as and when needed and repay it. It is used for operational purposes and the drawn amount fluctuates every month based on your cash flow needs.
Line of credit loans differs from term loans where you get a lump sum in your bank account and repay it over a predetermined period. You can use a line of credit loans for almost any purpose including major upgrades, marketing, or operational costs. The best part is; you’ll only pay interest on the amount you draw without having to worry about investing full amount into a highly profitable endeavor.
- You can get instant access to capital to manage any emergency expenses,
- Line of credit loans doesn’t require you to go through a tedious loan application process.
- This is best for seasonal businesses where you could take out as much or as little as you require
- Most lines of credit loans are unsecured in nature with amounts under $100,000. Such credit lines act as startup business loans where you don’t have to provide any collateral or place burden on your business’s financials.
- It’s a quick and easy way to secure working capital with no-strings-attached backup.
- Less interest payment than with a credit card.
- These can be secured as well based on different factors. Being credit scores the primary measure of creditworthiness; you can get a revolving line of credit at a lower interest rate by submitting a business plan or collateral.
6 Best Line Of Credit Loans for Small, Medium & Large Businesses
- Short-Term Line of Credit Loans
The terms of the line of credit loans differ from the term loans. A short-term line of credit loan is similar to a short-term loan and takes into account the qualification factors such as loan amount, interest rate and APR, credit score requirements, and revenue requirements. The short-term line of credit is easily accessible to borrowers with lower credit scores and annual revenues, and tend to have higher APRs. However, getting a short-term loan is easier to qualify and quicker to receive. Startups and new businesses can have financial assurance with a flexible revolving line of credit.
OnDeck Capital and Fundbox are the best short-term line of credit lenders.
- Medium-Term Line of Credit Loans
Likewise, the medium-term line of credit loans is alike medium-term loans where you can draw more funds and pay less due to lower APRs. Such loans also help cover inventory costs, repairs costs, payroll and bills, and to bridge gaps between payments and expenses. Even though the short-term line of credit loans and medium-term line of credit loans function the same way but pretty much are different products.
Only borrowers with good credit scores and higher annual revenue are able to for a medium-term line of credit loans. The loan process is longer from receiving the cash to being approved, and collecting the paperwork for application—because lenders want to know you’re capable to manage the money.
Kabbage and Lending Club are two best lenders of the medium-term line of credit loans.
- Bank Line of Credit Loans
Apart from alternative lenders, banks are the prime source of capital for most businesses—if you can qualify. Banks’ line of credit loans offers the lowest interest rates and highest loan amounts. However, qualifying funding from banks is very challenging and difficult. According to a study, 4 out of every 5 borrowers get declined for a business loan application. Moreover, the underwriting process is longer—so even if you qualify for a line of credit loan, you have to wait longer to get your hands on the cash.
Even with a line of credit, this proves you shouldn’t wait to apply for a loan until you really need it. Actually, this is applicable in terms of a line of credit loan, since there’s no trouble to secure one early on. While some lenders charge maintenance fees if you don’t make the withdrawals, but that’s easily avoided and worth the risk.
Chase Bank, Wells Fargo, and Bank of America are the best lenders for a bank line of credit loans.
- Collateral Based Line of Credit Loans
For asset-based lenders, the eligibility criteria include the borrower’s business history and borrowing habits to conclude your creditworthiness. They use borrowers’ past information to determine the future of their investment—that’s because they don’t have collateral against the loan.
Asset-based lenders depend heavily on your future projections. This is because the financing is tied to collateral, they’re counting on that collateral will help you repay your loan. Lenders that offer a collateral-based line of credit loans will typically put a lien on the asset—to put it simply, they’ll claim ownership over the collateral if you can’t repay them. The most common types of collateral used in asset-based lending include accounts receivable, inventory, machinery and equipment, real estate and other tangible assets.
It is important to get funding only for the right investment (smart spending). If you obtain a loan just to manage payroll, you’ll end up spending the payroll with the loan’s interest without any returns. But, if you secure funding to buy a piece of new equipment, the hope is that the added equipment will cover the loan costs in the end.
InterNex Capital and Balboa Capital are the best lenders for a collateral-based line of credit loans.
- Invoice-Backed Line of Credit Loans
The invoice-backed line of credit loans works similarly to an asset-based line of credit where the lender uses your accounts receivable as collateral to create a line of credit loan.
In the invoice-backed line of credit loan, you provide your eligible accounts receivable and A/R aging to lenders that are used to calculate the line of credit maximum—usually about 80-85% of your invoices. The payments on those invoices deposited into the bank account managed by the lender to pay off the line of credit. Additionally, if you don’t have any funds drawn, the funds redirected to your business.
The best part is it effectively repay your invoices instantly, allowing you to use funds as and when needed. Also, with an invoice-backed line of credit loans, your credit maximum will grow based on your weekly accounts receivable updates. You can borrow more based on more invoices you’re expecting—helping you manage your cash flow and business debts.
DealStruck and CrestMark provide the best invoice-backed line of credit loans.
- Business Credit Cards
For many, there is a confusion between a line of credit and a credit card. A business credit card works similar to a line of credit and they’re portable, physical lines of credit.
A business credit card is another important financing option to build your credit score with the speed, flexibility, and no collateral requirements. Moreover, there are 0% introductory APRs business credit cards to help you spend cash without any interest until a predetermined period. Apart from 0% introductory APRs, business credit cards offer several other benefits including speedy funding without the need to wait for approval, flexibility in the use, no collateral requirements, and points and rewards like free flights, complimentary accommodation, discounted meals, no foreign transaction fees and much more!
Chase, American Express. Capital One and Discover are among the top business credit card providers.
The Bottom line
Now that you know the six best line of credit loans available to you, you can make the smart choices for financing. You can apply for a line of credit loans even before you need it, so you can have the cash when you really need it without worrying about your cash flow. Understanding your credit requirements will surely help you represent a solid candidate when you apply.
Before you apply for a line of credit loans, shop around for terms, and compare factors such as credit limit, interest rate, repayment period, annual review and renewal, eligibility requirements, and any special benefits or rewards before signing on the dotted line.