What is a business line of credit, and is it right for my company?

Business lines of credit are another form of loan that businesses can look into if they need cash. Lines of credit operate like credit cards, and are designed to offer cash on hand if your business has cash flow or liquidity issues. Just like credit cards, the lines are revolving, so once you have paid off the debt you are free to use it again, continuing the cycle.

What is a business line of credit?

A business line of credit operates in a very similar way to a standard credit card. A business will take out a loan of a certain amount. This is known as the credit line, and the business has access to all of this money. The company will then use money from this fund to purchase things as needed. The company then pays back the money on the credit line, with interest, the same way that a credit card is paid off. As the credit line is repaid, the business has full access to the money again, and the process continues.

The company has access to the business line of credit just as they would for any other type of bank account. Most businesses will get a credit card connected to the account, but it can also be used through an app (depending on where it was accessed from), or through a checking account (if the business still deals in checks).

There are two standard forms of business lines of credit that companies can access. These are known as secured and unsecured.

Secured

A business takes out a line of credit, using collateral. If they cannot pay back the loan within the agreed-upon conditions, the lender has the authority to seize the collateral to pay it off. This is the easier way to obtain a business line of credit, and the most common. Because the collateral acts as a guarantee the loan will be repaid one way or another, the lender can afford to charge lower fees and interest rates.

Unsecured

This business line of credit does not involve collateral in case the business cannot pay back its loan. As a result of this, the lender does not have as much guarantee they will receive the loan paid back in full. Unsecured loans are typically harder to access, and more expensive to pay back, through higher fees and interest rates. This is done to offset the greater risk that the lender takes on when providing the funds.

There are benefits to both options, and it’s always important to do research before committing to any type of line of credit or loan. If the business line of credit is going to be used for small purchases, it may make more sense to apply for an unsecured line of credit. Smaller, frequent purchases may still require a line of credit if your business is seasonal or cyclical and struggles with liquid cash sometimes. You will very easily be able to pay the purchases off, but you need the funds now, not just when you have the cash later. If you are confident that you can pay off the business line consistently on time, it does not make sense to risk collateral.

Conversely, if the business line of credit is intended to be used to spend a lot of money (e.g. to fix a large piece of machinery, or to purchase large amounts of stock), it may be a lot safer to opt for a secured line of credit. This keeps all parties protected in case things don’t work out as intended (and is cheaper in the long run for the business).

Why choose a business line of credit

There are a number of reasons why a business line of credit is the right option for a business, but it is not a one-size-fits-all financial solution. It’s important to understand what their intended purpose is, so that you can determine whether or not this aligns with your needs.

Generally speaking, business lines of credit are intended to be reusable loans, for ongoing financial support. They are smaller sums than traditional loans, with higher interest rates and smaller minimum payments.

It is already clear who might not want a business line of credit: a company that needs a large lump sum for a one-off cost. Traditional business loans will offer larger sums of money, and have more favorable repayment schemes as it’s likely the company will not be able to pay it all back swiftly. Although in some cases a line of credit would still satisfy the need for cash, there are better ways of accessing it.

A business line of credit is for a business that may require cash on an ongoing basis. It doesn’t always have to be large sums, however still more than what they have in liquidity. These smaller amounts are easier to pay back, meaning the higher interest rates aren’t necessarily a concern. Businesses who want to make repeated requests for funds will be able to take advantage of the line of credit, which can be reused once it has been paid back, over and over again. Another benefit is that the business is not paying interest on the whole line of credit, only the portion that has been spent. If the line has been fully paid off, there are no interest payments required until the next spend on the line.

Lines of credit also offer more flexibility in terms of what they are used for. Traditional business loans are given to businesses for a specific purpose, which has to be identified at the time of the loan application. Lines of credit do not have these kinds of strict stipulations, and can often be used on any business expenses that occur. This is great for small, unexpected occurrences that need fixing fast, and cannot wait for a business loan approval.

Pros and cons

Pros
  • Most lenders operate swiftly – if approved, you should have the funds within a couple of days
  • Your business has more freedom to spend the funds on whatever you need, compared to a business loan that can only be spent for specific purposes, as detailed in the loan agreement
  • For business owners with poor credit scores, it can be easier to obtain a line of credit, compared to a traditional loan (although you are not always guaranteed approval)
  • Lines of credit are revolving – they are designed to be used again once they have been paid off, meaning you don’t need to reapply every time you need cash
Cons
  • Interest rates are relatively high
  • Business lines of credit are often capped much lower than business loans – they are not always ideal if you need a large lump sum of cash
  • You may be required to provide ongoing financing papers to prove that the business is still able to pay the line of credit back. If your financial position changes drastically, the lender may choose to end the agreement

How to get a business line of credit

Obtaining a business line of credit is a relatively simple procedure, however, it may differ slightly depending on what lender you are working with. However, there will be some standard steps that you should be prepared for.

It’s also important to note that although the process of applying for a line of credit is relatively simple and fast, it can take some time to gather all the necessary paperwork and information that you need. It is strongly recommended that you give yourself enough time to prepare properly, to save yourself time later on.

Determine what exactly you need

For some businesses, a line of credit is there as a safety net, just in case they need it. For others, the line of credit is used frequently to offset cash flow issues. What you intend to use the line of credit for will likely impact how large your line needs to be. Determine how much funding you require based on your needs, so you can ensure your line of credit can be used as intended. Lenders often want a brief outline of how you intend to utilize the line of credit, although you will not be expected to know specifics.

It’s important to note that your line of credit does not have to be static, you can always apply to increase or decrease your line at a later date, if you find out your needs have changed.

Find the right lender

There are likely to be dozens of lenders in your area that can offer your company a business line of credit. It’s important that you take the time to explore your options, and find a lender that is going to work well for your needs. After all, business lines of credit are often long-term, so you want to make sure you are forging a good relationship. Understand all of the different credit limits, fees, repayments, etc.

Generally, there are two different types of lenders. The first is a traditional bank or credit union. These are established entities that often require more stringent eligibility criteria to be met before they will offer a line of credit. If you are above the threshold, there are benefits to working with these kinds of established lenders. They can provide peace of mind knowing there are very few risks in doing business with them.

The other form of lender is an online lender. These are often less well-known businesses that offer credit lines for much lower eligibility standards. These types of lenders are sometimes the only option for businesses that have declined lines of credit from banks. There are a number of well-known, legitimate online lenders, so it’s important to consider this option seriously. However there are also lenders that may not be legitimate, so it’s very important to do thorough research about who you choose to work with.

Organize proof of eligibility

Lenders want proof of your eligibility, so it’s always good to prepare as much of your paperwork as you can. This will include the length of time you have been in business (most lenders will accept businesses that have been established for at least three months, but particular lenders may require longer).

You will also have to provide account statements that prove your income. Some lenders may only require a few months’ worth of statements, while others may request a year. Lenders will generally have a minimum revenue requirement that businesses need to meet, in order to be considered for a line of credit.

Lenders will also ask for a range of other business documentation that might include your business license, future business plans, lease documentation, tax returns, etc. All of this build your case as a legitimate business capable of paying off the credit line.

Finally, some lenders may want to look at your credit score. Not all lenders do, and it’s not the end of the world if your credit score is not the greatest. In most cases, the personal credit score threshold is lower than the threshold for obtaining other forms of loans. Most lenders will accept credit scores in the 600s, although the higher the score, the greater your chances are going to be.

Submit the application

Thanks to technology, a lot of lenders will allow you to complete this process online, for your convenience. The turnaround time for your application will vary depending on the lender, but it should be relatively swift. Some lenders can approve applications in as little as five minutes, as long as the application comes with all of the necessary documentation.

If you have been approved, you will receive a loan agreement. This should always be checked over before signing, to ensure you know what terms you are agreeing to. Agreements can always be amended at a later date (if you find that you want to increase or decrease the line of credit). You don’t need to feel as though you are locking yourself into a loan that you cannot pay back.

If you have been declined, you may receive a reason why. Sometimes lenders will discuss this with you, and give you the opportunity to rectify your application if it is possible (e.g. you have failed to provide all of the necessary paperwork. If it’s something that cannot immediately be fixed (e.g. your income levels), you may want to wait and try to apply when circumstances have changed. Alternatively, you may want to apply with other lenders, although it is likely their criteria will be very similar.

FAQs

What is a business line of credit?

This is a revolving loan given to a business, where they can spend the money, pay it back, and then spend it again. It is similar to a credit card, where there is a predetermined limit, and you can spend whatever funds remain within the limit.

Are there different types of business lines of credit?

Yes. New York Tribeca Group specializes in the following:

  • Asset-Based Financing
  • Bank Lines of Credit
  • Short-Term Lines of Credit
  • Long-Term Lines of Credit

If you are interested in obtaining a line of credit, but you are not sure what kind is right for you, our team can help you decide.

How do I know if my business is eligible for a business line of credit?

The New York Tribeca Group offers an online assessment that you can take, to see if you would be eligible for a line of credit. Once you have done this, you will have a better understanding of whether or not this is the right choice for you. If you have questions about eligibility, you are more than welcome to reach out to us directly.

Once I have been approved, how fast will my business receive the line of credit?

After approval and after your business has signed the contract, we aim to have the funds with you within 24 hours.

Can business lines of credit be used to purchase anything (like a credit card can)?

No, there are still limitations on what the line of credit can be used for. These limitations are much wider than a bank loan, but businesses should still be aware of what they can use it for.

Let New York Tribeca Group help your business succeed

Do you think that a business line of credit is right for you and your company? New York Tribeca Group can provide you with the financial support that you are looking for.

We offer business lines of credit up to $5,000,000, with repayment terms of up to 2 years. Our application takes just five minutes to fill out, and we guarantee that you will have an answer within 24 hours. We have experience supporting businesses of different sizes, across a wide range of industries, and all support is completely tailored to the needs of the client.

Our financial services would not be complete without our excellent consulting and customer success team. We want to find the right fit for all of our clients, so the team works together to ensure that all of your needs are met. If you have questions or concerns at any point, we are always available to provide you with the right information.

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