What Is Required for a Business Line of Credit?

Applying and qualifying for a business line of credit can take some effort, but it’s not difficult or time-consuming through our marketplace.

Different lenders have various qualifications, so whether or not you qualify can vary based on where you apply. The benefit of applying through a marketplace is that you can learn your options through a variety of lenders with only one application.

Banks and credit unions typically have more aggressive and demanding qualifications. If your business doesn’t have a spotless financial record, qualifying can be difficult. Even if your application is denied at a bank, you can qualify based on your annual sales at an online lender.

Marketplaces like National are less demanding, focusing on your business and opportunity over factors like history and credit. To qualify for a business line of credit at National, you only need:

What Is a Business Line of Credit?

A business line of credit gives you access to cash whenever you need it and is an extremely flexible financing option. This type of loan allows you to draw cash from your credit limit as you need it, and only pay interest on what you use.

With revolving lines of credit, more cash will become available as you pay it down. Unlike selling equity, getting a small business loan allows you to maintain business ownership, profits and full control. Business lines of credit are the perfect financing tool when your business is in growth mode and you need access to funds.

 You can also use it to bridge cash flow gaps during seasonal slumps, or as a rainy day fund. There are no restrictions on how you can use it—you can use a business line of credit to cover any costs or opportunities you face.

How Does a Business Line of Credit Work?

Business lines of credit function like credit cards, but with a different structure that’s better suited for small business owners. They’re also better for tax purposes—you can write off interest on a credit line, but not for a personal credit card.

After qualifying for a business line of credit, you’ll receive a total credit limit. You can draw as much or as little as you need from that total limit in any number of installments, and you’re under no obligation to use the full amount.

You can continue to access additional cash as you pay it down. Instead of paying interest on the full credit limit, you’ll only pay interest on what you take. Depending on your lender, you may have a non utilization fee, and may have to pay for the line if you don’t use it. Before signing an agreement, be sure to ask for clear information about any fees. Avoid any agreements without clear, transparent information.

How Does a Revolving Line of Credit Work?

Unlike small business loans, revolving lines of credit work by allowing you to continue accessing additional funds as you pay your balance down and require more cash. In other words, it is a type of loan in which the user can borrow up to their credit again once the debt is repaid. 

Some business lines of credit are revolving, while others aren’t. When you discuss the terms of your agreement, be sure to ask questions and confirm whether or not your line of credit is revolving. Revolving lines of credit are the fastest and easiest way to access additional cash as your business grows. Once you pay down part of the balance, you can draw more cash without reapplying. It’s simple, fast, and easy, and your working capital won’t be limited to your checking account.

For example, say you qualify for a $100,000 line of credit. You borrow the full $100,000, and use the cash to grow your business. You then pay down $50,000 using the revenue you generate, putting both your balance and credit limit at $50,000. With $50,000 paid down, you now have the option to borrow an additional $50,000. There’s no set end date, either. As long as you keep your credit line active, or continue drawing and paying it down, you can utilize an LOC for months, or even years. If you’re not actively using it, though, your small business line may expire.

The Difference Between a Line of Credit and Small Business Loan

What’s the difference between a line of credit and a small business loan? Both provide your business with the cash you need to grow, but the way these products are structured is different. When you apply for a small business loan, you receive the full amount you qualify for in one lump sum deposit.

A line of credit, on the other hand, offers more flexibility than most loans and cash advances. Instead, you have the option to draw cash in increments, and continue drawing more until you reach your credit limit. Typically, lines of credit have lower interest rates and closing costs, which can make them more cost-effective. Small business loans are the better choice when you’re taking on a huge project with defined expenses. Lines of credit, however, can be better as a flexible backup to cover unexpected costs, or as a backup for your bank account.

Secured Vs. Unsecured Business Line of Credit

A business line of credit can either be secured or unsecured. The difference depends on whether or not your lender requires you to put up collateral.

Secured lines of credit are backed by collateral, while unsecured credit lines are not. To lower their risk, some lenders require that borrowers put up collateral, such as real estate, receivables, inventory, equipment, or their home.

However, putting up your home as collateral puts both your personal and business lives at risk. For this reason, it’s usually not a wise choice. Backing your financing with collateral simply gives the lender confidence in the event you default. Years ago, it was difficult for a small business owner to qualify for an unsecured line of credit, especially through traditional lenders.

Through the new world of online lending, small business owners can qualify for multiple unsecured line of credit options and compare rates. While they don’t require collateral, unsecured options may have slightly higher rates due to the lender’s increased risk.

By putting up collateral and opting for a secured line of credit, you may qualify for a higher approval. That being said, you can usually still qualify for a competitive unsecured line of credit based only on your annual sales—even with personal credit challenges.

Business Credit Cards Vs. Business Line of Credit

What’s the difference between business credit cards and business lines of credit? Fundamentally, credit cards and lines of credit are similar—they give you the ability to handle expenses when you need to.

Both financing products only charge interest on what you use, rather than your total credit limit, but the interest is structured differently. However, a business line of credit is the ideal option for your small business if you’re growing or solving challenges and you need a lower-cost solution.

Usually, only about 3% of your minimum monthly credit card payment goes toward principal. Over time, this can add up to be quite expensive. Lines of credit, on the other hand, typically have lower interest rates and better amortization schedules. Overall, this normally adds up to a lower total cost.

Credit cards are primarily transactional, meaning you can only use them to make purchases. It’s possible to borrow cash using a credit card, but this can be expensive. On the other hand, lines of credit give you the ability to instantly draw cash as you cover expenses and manage working capital.

If you’re debating between getting a credit card vs. a business line of credit, you should also consider fees. Some credit cards involve hefty interest rates. In most cases, these costs will outweigh the draw fees you may or may not pay with a line of credit. If you opt for a business line of credit, you won’t accrue rewards like you would with a credit card.

However, you can maximize the value of both financing options by spending with your credit card to accumulate rewards, then paying the balance down with a line of credit.

Can You Use a Business Line of Credit for Anything?

Lines of credit are intended to be flexible financing options custom-tailored to your needs. You can use them to cover expenses that are weighing your business down, or pursue exciting new growth opportunities. There are no restrictions on how you must spend this money— you can put it toward any expenses. Some of the most common ways that businesses utilize this business financing option include:

How Do Interest Payments Work?

Most business owners prefer a line of credit over other options because of how interest rates are structured. Rather than charging on the total approval amount, you’ll only pay interest on what you take. Using the previous example, let’s say you qualify for a $100,000 business line of credit, and draw $50,000. You’d be charged interest and principle only on the $50,000 you drew, rather than the $100,000 you were approved for. This structure allows you to keep your line of credit on the sidelines for when you need it, without worrying about excessive interest.

What Is a Typical Interest Rate for a Business Line of Credit?

Interest rates for your business line of credit aren’t as straightforward as the way interest is structured. Rates can depend on a number of factors about both your business and the lender you choose.

Applying through a direct lender means there’s only one option you could potentially qualify for, while applying at a marketplace leaves the door open to several potential options, ensuring you find the best one.

It’s easy to calculate monthly payments based on an estimated rate. Let’s say you qualified for a business line of credit at 6% interest and drew $50,000. The interest would be amortized over 12 months. Typically, in this example, your total interest paid over the course of the term would be $3,000, but can vary depending on how the lender structures it. That means your monthly interest payments would be $3,000 divided by 12, which is $250 per month that your balance is outstanding. You can find your expected monthly payments based on a fixed interest rate using our business line of credit calculator.

Small Business Credit Line Benefits

A business line of credit can be a powerful tool in your back pocket. The flexibility allows you to draw funds whenever you need them and stay one step ahead of the latest challenge in your business—a priceless opportunity for any entrepreneur. Here are a few of the many benefits of leveraging a business line of credit in your operation:

• Fast access to cash
• Only pay interest on what you draw
• Might not need to offer collateral
• Manage your working capital, short-term projects, and other expenses
• Strengthen your business credit

Term loans, SBA loans, and other traditional financing products provide you with a set amount of money that you must repay throughout the term outlined by your lender. If you wind up needing more than you originally anticipated, you’ll have to take out an additional loan on top of your previous financing, which can quickly become difficult to manage. A business line of credit is a way around this challenge—the structure allows you to draw as much as you need from your total credit line without having to worry about taking out additional financing to afford your growth plans. 

Choosing a business line of credit over another financing solution could also help you save money on interest. If you were to secure a term loan to meet your needs, you’d have to pay interest on the total borrowed amount, whereas you only pay on what you use with a business line of credit. Plus, making consistent, timely payments on your credit line will work to strengthen your business credit score, which is a priceless opportunity that all entrepreneurs should take advantage of. 

The real benefit of any business financing option is the ability to set your plans into motion and take your business to the next level. A business line of credit can allow you to take advantage of new opportunities, manage your working capital, and much more, allowing you to grow your operation and win business back from the competition.