Xavierarnau/Getty Images;Illustrated by Issia Davis/Bankrate
Business Line Credit is a popular form of business form and for good reason. According to the 2024 Small Business Credit Survey, the business credit line is the most popular type of funding, with 37% of businesses competing for one.
The business line of credit offers the ultimate flexibility and allows you to use your funds to buy business up to the available credit limits. Additionally, repaying the loan will allow the revolving credit lines to fill up available credit limits and be reused for future fundraising.
The business line does a lot for them, but they may have lower loan amounts and other drawbacks. Think about how your credit business line works and how you might consider using one to determine if that fund is right for your business.
What is the business line of credit?
Business Line Credit is a flexible business loan that functions similar to a business credit card. The borrower has been approved to a certain amount, allowing him to withdraw his credit line if necessary, and he can pay interest only on the amount he actively borrows. Funds are usually accessible through business checking accounts or through mobile apps.
Unlike traditional business loans and term business loans where you spend the lump sum payments at once and pay back interest, the business line is renewable. As borrowers repay, the amount of credit available will be updated, just like payments for credit card restrictions.
How does the business line of credit work?
A business line of credit work by providing funds up to specific credit limits that businesses can tap whenever they need money. Funds are usually repaid in less than two years in the short term.
Credit business lines generally have less loan amounts than traditional business loans, but are often funded more quickly. While traditional banks can take days or weeks to fund, many online lenders can provide access to funds as quickly as within business days.
The business line is either protected or unsecured. Protected credit lines include collateral such as cash, investments, or real estate to support your loan. Collateral indicates to the lender that you have assets that you can sell to repay the loan if you suddenly can’t make regular repayments. The advantages of providing collateral are generally more favorable loan terms and lower interest rates.
A credit line can incur more charges than a business loan, which can lead to higher borrowing costs. We recommend keeping this in mind when considering the total cost of your business line. Common business line fees include annual fees, origination fees when you first apply, and account maintenance or monthly fees, and you will be withdrawn for each withdrawal from the credit line.
Business Line Requirements
Once you are ready to get a small business credit line, your lender will review your application and determine your eligibility. Below we will look at some of the important factors they consider.
- Credit score. The lender will consider your personal and business credit score. It is possible to get a line of credit with a low credit score, but lenders usually prefer fair credits, such as 600-670 or higher. The exact credit score requirements vary from lender to lender.
- Annual revenue. Lenders require you to earn minimum annual revenue. Some lenders are flexible and consider companies with annual revenue of $50,000, but many prefer revenues of at least $100,000 or more.
- Business time. Lenders want to see established, profitable businesses. In business, a minimum of 6 months to 2 years is the standard.
- collateral. If you can provide assets to support a credit line, you can qualify for low interest rates on a secured credit line.
What to consider when getting a business line?
Like almost everything, getting a small business credit line comes with some advantages and disadvantages.
When you get a business line of credit, you will:
- There is a cost of small amounts to moderate sizes.
- There is a need for flexible spending.
- I think I’ll use the credit line again in the future.
- Your credit score will be lower or your earnings will be lower.
Business Line Credits can help with a variety of expenses, but they are not suitable for all solutions.
However, if you need a business loan for a specific one-time purchase, it may make more sense to get a business term loan. For example, you can get a lower interest rate using your equipment as collateral, so getting a loan for your equipment could make more sense if you are trying to buy equipment for your business.
Conclusion
The SME credit line makes a great and flexible solution for the inconsistent cash flow of SMEs. But like any form of fundraising, there are risks to consider. Comparing lenders to find competitive rates and criteria can save you money over time.
Credit limits may be lower than those earned on small business loans, but borrowers can repeatedly return to the well without having to reapply for funding.
