A business line of credit is an agreement that establishes a maximum loan amount a business can borrow. A business line of credit can be accessed at any time as needed as long as it doesn’t exceed the maximum limit. Interest is only paid on the money used, and once it’s paid back, you can use it again – much like a credit card.
$10K - $1M+
6 months - 5 years
7 to 25%
As fast as 1 day
How does a Business Line of Credit Work?
Like a credit card, the lender sets a maximum amount and the business can draw from it using either checks or cards. Borrowers can request a certain amount, but they don’t have to use it all. This flexibility is the main appeal of a business line of credit, which is ideal for emergency funds to avoid business setbacks.
At FaaSfunds, we can tell you all you need to know about a business line of credit, and help figure out if it’s right for you.
Pros & Cons
Pros of a Business Line of Credit
- Money available when needed
- Interest paid only on funds drawn
- Suitable for a wide range of business needs
- Bad credit is acceptable
- Good for improving credit score
Cons of a Business Line of Credit
- May need to provide updated documents on each draw
- Longer Approval Times
- May require collateral
- Lower credit score means higher rates
Instantly see your top options for business loans and credit cards based on your business’s needs using our FaaSmatch technology.
Who Qualifies for a Business Line of Credit?
There are many variables associated with getting a line of credit. The maximum amount, duration, repayment terms and interest all depend on your business’s already established credit and revenue.
Often, new businesses may be able to qualify for short-term lines of credit while more well-established businesses can receive medium-term lines of credit.
How Do You Apply for a Business Line of Credit?
Banks have long, intensive line of credit applications – they require a lot of paperwork and wait time. FaasFunds offers a quick, streamlined way. Apply using FaaSfunds online application and we’ll connect you to the top line-of-credit lenders, and get you approved in as little as a day.
What You're Going to Need:
- Driver’s License
- Voided Business Check
- Bank Statements
- Balance Sheet
- Profit & Loss Statements
- Credit Score
- Business Tax Returns
- Personal Tax Returns
What else should you know about Business Lines of Credit?
They may be similar to credit cards, but there are many other details and differences you should know before applying for one.
The fundamentals are:
- A lender gives your business access to a set amount of money (or credit limit) to finance business expenses.
- Your business can use this at any time for any expense, as long as it’s under the credit limit.
- You don’t make payments on what you don’t use – your interest rate reflects only the money within the limit you’ve spent.
- Lines of credit are best for repeated cash flow
What does a “Revolving Line of Credit” Mean?
Line of credit financing sometimes is referred to as “revolving.” This is because it doesn’t require you to apply again and again for a loan. Once you pay off what you’ve spent within your credit limit, you can use up to that limit again without applying again. This is part of the allure of a line of credit – you save time, energy and stress by not having to apply for multiple financing options.
A few lenders, however, may not offer a revolving line. If they’re non-revolving, the re-application process is usually simple as long as you’ve been a good borrower previously.
How Business Lines of Credit Differ from Traditional Loans
Business lines of credit traditionally have lower interest rates and closing costs, but have pretty strict repercussions if you exceed your limit or miss a payment. Traditional loans are usually used for one time, specific, larger purchases, while lines of credit are best for repeated spending or cash flow. This doesn’t mean you can’t make large purchases with a line of credit, but often, traditional loans are better suited for these types of expenditures.
Different Types of Business Lines of Credit
The differences for lines of credit lie in their minimum qualifications, maximum fund amounts and their interest rates. Online lenders usually will only offer short- and medium-term lines of credit, but these both don’t really have term lengths. You can withdraw and pay back funds whenever you want, but the “short” and “medium” refer to the credit limit. Longer-term lines of credit are usually only given out by traditional banks.
Not sure if a business line of credit is right for you?
Let us walk you through your options and help you decide which program is right for you.
Uses for Business Lines of Credit
Since business lines of credit are so flexible, they’re really attractive to use for recurring expenses. Things like:
- Operating expenses
- Cash flow gaps
- Emergency funds
- Seasonal expenses
They’re both forms of revolving credit, but business credit cards have several limitations that lines of credit don’t.
- Credit cards are typically paid monthly. Lines of credit usually are not.
- Credit cards typically have higher interest rates.
- Credit cards charge fees for cash advances and balance transfers.
- Lines of credit give you access to cash. Credit cards do not.
Interest rates are set by the lenders and the market rates, and they vary widely according to your business specifics. However, these rates are often lower than a business credit card.
Here’s a run down:
You run a restaurant in a small college town. During the summer, when all the students head home or to internships, you have a lull in your business. In order to pay your expenses in June, July and August, you need some extra cash. You know that after these three months, your business will pick up significantly. So, you apply for a $25,000 line of credit. With it, you end up spending $20,000 on your rent, payroll and supplies for those three months. If your interest rate was 10%, you’d pay back that $20,000 plus 10% in interest, for a total of $22,000. Once you pay that off, you have $25,000 again and you can keep it to use when you have other lulls in business, like winter break.
Let one of our FaaSfunds financial experts help lead you through the process and guide you down the best path for your business financing needs.