Business Line of Credit: Explained

Discover how a business line of credit works.

A business line of credit offers a company the flexibility to withdraw funds and repay debt when needed. A business line of credit works a bit like a credit card. Businesses can borrow up to a certain amount and only pay interest on the amount withdrawn. Then the business can repay the money as soon as they wish, without exceeding their credit limit.

Rather than going through the sometimes lengthy process of securing a loan, with a line of credit, businesses know that they have a certain balance available to borrow quickly as needed.

Because of the flexibility of the loan, businesses can withdraw funds as they need for a range of purposes, whether in need of money to expand, manage cash flow, purchase more inventory, or pay for unexpected expenses.

Benefits of a Business Line of Credit

Doesn’t require collateral: As a form of unsecured debt, a business line of credit won’t require any collateral. That means, the business doesn’t need to offer up an asset to the lender, which the lender can sell if the borrower defaults on the debt.

Access large sums of money quickly: Businesses can open a line of credit ranging between $10,000 up to $100,000, depending on their credit score. Businesses who qualify for a line of credit for more than $100,000 may need to secure their line of credit with a blanket lien on assets or a certificate of deposit.

Easily withdraw funds when needed: Businesses can quickly access their line of credit by using a business checking account, a small business credit card, or a mobile banking app.

Lower interest rates: Interest rates on a business line of credit are usually lower than a business credit card, which can have rates of 20% APR, or a cash advance.

How to Qualify for a Business Line of Credit

The requirements for a business line of credit can vary according to the lender. Most will require a few things to qualify including:

Years in operation: Typically, a business will need to have remained in operation and in current ownership for a certain period of time. Many lenders will require a business to have been open for at least six months.

Stream of revenue: A lender may require the business to have adequate and consistent incoming revenue. Typically, lenders will require a business to earn at least $25,000 in annual revenue to qualify.

Credit score: While not all lenders consider credit score, some may require a business to have a minimum credit score of 500 or higher to qualify for a line of credit.

Documentation: To apply, businesses will need to provide financial information such as personal and business tax returns, bank account information, and business financial statements.

Increasing a business line of credit: Once you open a business line of credit for the first time, you can start with a modest amount to build credit. By making payments on time, you can increase your business’ line of credit and build a better credit profile. Every six months to a year, the lender can review the line of credit and increase the amount for businesses that make payments on time.

 

Joe Schwartz | Loans Editor