Companies depend on a strong cash flow to keep their doors open and grow their business share. When they face unexpected expenses, seasonal ups and downs, and other changes in working capital needs, business owners do have a few financial options. These could include taking out a loan to repay, factoring their invoices for a debt-free cash flow solution, or acquiring a business line of credit. A business line of credit is a time-tested source of ready funds that offers companies considerable flexibility. Companies can use their funds for buying inventory, paying off debts, managing cash flow gaps through slower business cycles, adding equipment, hiring staff – whatever the company needs. Companies also use their credit lines to take advantage of business opportunities and keep open during business emergencies of all kinds.
For a quick overview, let’s take a look at some frequently asked questions about a business line of credit.
What is a business line of credit?
A line of credit, whether it is a personal or business, represents an arrangement between a customer and a financial institution that enables the customer to be able to withdraw funds up to a predetermined maximum loan balance. The financial institution could be a bank, a factoring company, or other lender. You can think of a business line of credit as a sort of revolving loan that parallels how a credit card might work. The advantage over a credit card is typically lower annualized interest rates.
The good news is that you do not incur any interest until you draw on your line of credit. You only pay interest on the funds you use. While a traditional loan will set you up with one lump sum and fixed installment payments, a business line of credit is flexible and variable depending on when you need the cash
How does a business line of credit work?
The customer can borrow as much money as needed whenever the customer chooses, as long as the dollar figure does not go over the maximum loan amount set by the financial institution. The customer simply needs to meet the financial institution’s requirements for repaying that loan amount within any predetermined time frame. A business line of credit typically does not have a time limit; the arrangement is open-ended. However, some financial institutions work with terms as short as six months or as long as five years. Some business lines of credit will need to be secured by collateral, such as your inventory or invoices, while others are unsecured.
What are the pros and cons of a business line of credit?
Compared to some other sources of working capital, a business line of credit can offer certain advantages.
- Funds are accessible right away whenever you need capital
- You do not need to have perfect credit to qualify
- A business line of credit helps you improve your credit score
- You can use the funds to pay a variety of business expenses
- The application and approval processes can be completed very quickly
- Interest is charged only on the amount that was withdrawn
- The maximum amount can be increased after you have paid back the initial loan
- You can save time without having to re-apply for a new loan each time you need funds
- Your interest rate and closing costs can be lower than other types of loans
- You won’t pay for cash advances or balance transfers
You can also encounter disadvantages with some financial institutions’ line of credit arrangements.
- Borrowers with lower credit scores can face higher interest rates
- Collateral may be required
- Sometimes updated documents must be submitted every time you want to receive funds
- Late payments can result in higher interest rates
- Credit card companies typically charge fees for cash advances and balance transfers
Wise business owners study the advantages and disadvantages before committing to a business line of credit and make informed business decisions based on their findings.
How long does it take to get a business line of credit?
When you work with a well-established financial institution that focuses on customer service, you can be approved for a business line of credit very quickly. Here’s a look at the typical number of business days required before you receive your first funds from a variety of lenders.
- Business Line of Credit – 1 day
- Invoice Factoring – 1 day
- Short-Term Loan – 2 days
- Personal Loan – 2 days
- Merchant Cash Advance – 5 days
- Start-Up Loan – 10 days
- Small Business Admin. Loan – 15 days
How do you qualify for a business line of credit?
Different financial institutions have different requirements. Some require applicants to be in business for longer than six months. Others look for businesses that have proven to be creditworthy. Some institutions set a minimum annual revenue figure for applicants, such as $100,000 or $500,000 a year.
What documents are needed to apply for a business line of credit?
You can expect to submit a variety of documents to the financial institution during the application and approval processes. They typically include common business papers such as the following:
- Bank statements
- Driver’s license
- Recent business and personal tax returns
- Profit and loss statements and balance sheets
- Voided business check
Where can you learn more about getting a business line of credit that’s right for you?
When you are exploring various sources of working capital, whether you need to cover payroll or invest in an unexpected business opportunity, a business line of credit could fill your needs. Unlike some loan instruments, the business line of credit offers considerable flexibility. In addition, you only “pay for what you use,” meaning when you draw down the line of credit and take out a certain amount, you are only charged interest on that specific amount. Maintaining a business line of credit with a trusted financial institution can save you time and energy when you need funds fast.
To learn more, contact the financial experts at Interstate Capital, a leader in small and medium-sized business funding since 1993. They can analyze your cash flow and get you set up with dependable and affordable financial solutions fast.