Business Line of Credit

A Business Line of Credit (LOC) allows you to draw against a predetermined credit limit, as you need it, instead of receiving the full loan amount at one time. The beauty of this system is that you pay interest on the funds that you actually withdraw. As you pay down the balance on your line of credit, you increase the amount available to draw in the future.

The Details

Business Line of credit gives you fast access to capital (aside from accessing your own cash). It allows you to draw funds when you actually need them. It is a tool that most business owners use to grow their organization. It is pertinent to mention that the working capital of a business may not be able to cover all its expansion needs. This is why a business line of credit is a viable tool in today’s business climate.

A Business line of credit can be obtained from online lenders, regional credit unions, national banks and traditional lenders. Credit lines typically have smaller borrowing limits than term loans. This makes it ideal for unexpected charges but not for large capital investments. Banks have high minimum qualifications and often require specific collateral. Online providers are a bit more flexible. Generally, they are quicker to obtain from scratch, but drawing from an established line of credit is even faster.

Banks offer more affordable credit lines than online providers. However, when used for high-ROI opportunities, online LOCs can be a great option. The repayment terms are 6 month terms, but you can draw against the line again before repaying the loan completely. If you borrow again before full repayment then your 6 month window to pay off the line of credit starts over.

Traditional lenders typically offer the most competitive interest rates, somewhere around 5% – 13%, on their line of credit products. However, they will also have the highest requirements when it comes to time in business, annual revenues, and credit scores. APRs for most credit line products from alternative lenders are around 20% – 40%.

Note: These costs are similar to what you pay with a small business credit card, but with a business line of credit you get access to cash you can put in the bank. Some expenses or cash flow needs that come up will not let you pay with a credit card. Having credit you can turn into cash is an advantage because you can use it to make any unexpected payments.

To qualify for a business line of credit, you’ll typically need to show that you have:

  • Credit score 600+
  • 6+ months in business
  • $2.5k in average monthly revenues
  • Ability to pledge short-term assets (like accounts receivable)
  • No recent bankruptcies, foreclosures, or tax liens

The Good

There are good times to apply for business line of credit. Applying at the right time can position you to be approved for a larger limit, low interest rate, and more comfortable repayment schedule.

The Bad

These rules can be hard to stick to because for many business owners it seems counterintuitive to ask for financing when you don’t really need it. But when it comes to business line of credit that’s exactly what you need to do.

Final Recommendation

A business line of credit can be a very affordable solution to short-term working capital needs or emergency financing, but it requires you to plan your application in advance to get the best rates and terms. If your business is looking to establish a business line of credit quickly, we recommend you choose RUNWAY.

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