Business Line Of Credit
Business Line Of Credit: A Complete Guide
You may never really know when you would require some extra funds for managing your small business. You may also not know whether the business loan you took is more than what you actually require.
For such situations, Fund.Do provides business line of credit services.
What Is Business Line Of Credit?
Business line of credit is a borrowing method that is very close to credit cards. Here, the lender does not provide the borrower with a lump sum amount. Instead, they are given a maximum limit. The borrower can withdraw as much as they require within this limit.
Business line of credit can be considered as a type of small business loans. However, one of the reasons why businesses prefer a credit line over traditional term loans is because a line of credit does not require them to pay interest on the entire amount allotted.
As opposed to other business loans, the borrower is only charged with interest on the amount withdrawn by them. For instance, if you are provided with a line of credit worth of $100,000 and you use only $80,000, the interest you pay will be for $80,000 only.
A small business line of credit is typically used for covering day-to-day expenses. As the amount sanctioned is not as high as other business loans, it is used for financing a business’ short-term needs.
Some of the areas where you can utilize a line of credit are:
- Funding short-term working capital needs
- Purchasing inventory
- Taking care of payroll
- Purchasing decently priced equipment
- Funding, marketing, sales or promotional campaigns
At Fund.Do, we ensure that all your financial needs will be taken care of. On approaching our lenders, you will be provided with the financial aid that best suits your business. Right from your first day of contact to the day you settle all dues, our executives will guide you every step of the way.
How Does A Business Line Of Credit Work?
The workings of a business line of credit are not that complicated. It works in a way that is pretty similar to the way credit card do.
On opening a line of credit, you will be provided with the pre-decided amount of funds. This amount will just be at your disposal, without being considered being used by you. You can withdraw funds from out of this balance as and when needed.
At the end of every month, we will send you an invoice. This invoice will show you the amount of credit you used and the time(s) when you used it. You will also receive the interest charged on the amount you used for your business needs during the given month.
As mentioned above, you do not have to pay interest on the entire credit provided to you. Once you repay the used amount along with interest, that amount will again be available to be used. There is no need for reapplication.
Let’s say you were provided with a credit line worth $50,000 in the month of June and you used $25,000 during the month. At the end of the month, you will receive an invoice with interest charge on the $25,000 you used.
Once you have paid your $25,000 with the accrued interest, your credit balance will go back to $50,000. You are not required to reapply for a $50,000 credit again.
The amount of credit provided to you and the rate of interest charged differ from one lender to another. We make this decision considering:
- Your personal credit
- Your business credit
- Servicing requirements (if any)
- The financial success of your business
- The condition of the sector in which your business belongs
- The value of your collateral
How To Apply For A Business Line Of Credit?
The process of applying for a line of credit for your business is not too different from the process of procuring other business loans.
Here are the major steps involved in the process, explained briefly:
- Choosing The Type – The first step is to select the type of business line of credit you are willing to apply for. This will largely depend on the business needs you need to fulfill with the funds.There are five major types of lines of credit – Unsecured, Secured, Personal, Business and Home Equity. It is important to thoroughly assess your business before choosing the credit line and going ahead with the application.
- Assess Yourself As A Borrower – Once you have decided the kind of credit line you want to go for, it is advisable to assess yourself before approaching us. It is important to note that getting a small business line of credit approved can be more challenging than getting a traditional business loan approved.
The key factors you need to consider while assessing yourself as a borrower are:
- Credit Score – It goes without saying that you will be assessed on the basis of your personal and business credit score. You can check your credit score online and make an assessment accordingly.
- Term Of Holding Business – For providing a business line of credit, borrowers actively holding their businesses are preferred. Generally, you need to have spent at least six months actively managing your business to be eligible for a credit line.
- History Of Bankruptcy – It is extremely difficult to obtain a line of credit (or any major business loan) if you have a history of bankruptcy. However, it is not impossible, provided you rank exceptionally high on other factors.
- Collateral/Security – Although you can obtain a line of credit without having to pledge any of your valuable assets, having collateral would act as an added advantage. If you can provide security against your credit, the chances of your loan approval will increase.
- Business Revenue – Lastly, assess your financial statements and ascertain your business revenue. Majority of the lenders want to ensure that you are able to make enough money to settle your debts.
- Approaching Our Lenders – Majority of the work is done once you have assessed yourself as a borrower. Once you believe you are eligible to receive a business line of credit, you can approach our lenders.Once you approach us and explain your financial needs, we will help you fill out the application forms
- Filling Out The Applications – Finally, the last but the most crucial step involved in getting a small business line of credit is filling your applications.There is not one standardized application form. It is different for different lenders and different types of credit lines you can apply for.You can either approach the lenders physically or apply through an online application. In either of the cases, you will be required to produce a few financial documents to verify the claims you make regarding your needs.
Here are some of the key documents you can surely expect to bring to any lender for any type of credit line:
- Personal ID
- Balance sheets
- General details about your business
- Business and personal tax returns
- Other personal and business financial statements (as required)
Once the application form is duly filled and documents submitted, our executives will review them and provide you with the credit as soon as possible.
Types Of Business Lines Of Credit
- Unsecured Line Of Credit
Unsecured business line of credit is similar to an unsecured loan. Here, you are not required to provide any collateral to your lender for procuring your credit. Majority of credit lines are unsecured.
Just like traditional term loans, an unsecured business line of credit is provided on the basis of your personal and business credit. You need to prove your creditworthiness to obtain this financial aid. For this, make sure you have a decent history of repayments and are managing your current credit well.
- Secured Line Of Credit
Similar to secured business loans, a secured line of credit requires you to provide collateral to the lender in exchange of the credit. You can pledge business assets such as buildings, machinery, inventory, accounts receivable etc as security.
The assets you pledge as collateral are retained by the lender until you settle all debts and are returned to you thereafter. In case you default the payment, you lose your ownership over the concerned asset.
- Personal Line Of Credit
This credit line is similar to a personal loan and is not directly related to a business. Here, you can avail a line of credit on a revolving basis to cover your personal expenses.
The terms and conditions such credit lines differ from one lender to another. Even if you are choosing to avail a personal line of credit to fund your business, your personal finances and assets will be involved in processing and repayment.
- You must be a US citizen
- You should be of the minimum contract age according to your state
- You should have an active bank account
- You should reside in the state where the lender provides their services
- You should have a steady source of income
- Business Credit Cards
Though business credit cards technically fall under the umbrella of business line of credit, they are a little different from the latter.
Business credit cards allow you a higher credit limit. They can be unsecured or obtained by providing collateral to the credit card provider. Whenever you want to withdraw a certain amount from your credit, cash is deposited into your bank account.
If you want to withdraw cash using a business credit card, you can do so, but the lender would charge you higher card fees and annual percentage rate (APR). Similar to personal credit cards, business credit cards involve annual and late-payment fees for their services.
A major difference between business line of credit and business credit cards lies in their suitability for businesses. Business credit cards generally suit a smaller business operating at a very limited scale. They can also be used by newly established business until they find a firm financial footing.
On the other hand, business line of credit is suitable for businesses that are already established and operate at a larger scale (relatively).
Just like personal credit cards, businesses can avail excusive rewards and cash bank on business credit card transactions. These rewards are generally offered for business expenses such as electricity, cable, internet, gas etc.
If you are lucky enough, you can also obtain a business credit card that would not require you to pay interest for your balance for a set period of time after signing up.
- Home Equity Line Of Credit (HELOC)
Under this line of credit, you are required to pledge your house as security for obtaining a credit line. The credit limit you receive in exchange of this collateral depends on the current equity of your house.
The value of HELOC credit limit generally amounts to 80% of the value of the house, with the mortgage balance owed by the borrower. The workings of this credit line are similar to any other line of credit. The borrower is allowed to withdraw up to a specific credit limit and charges interest on the amount withdrawn.
The draw period for this line of credit is typically ten years. Once this period is over, your balance will be considered due, marking the start of your repayment period.
On opting for HELOC, you might have to pay certain specific closing costs, such as the cost of appraising your property. Looking at such expenses and the collateral being used, such lines of credit are suitable to cover high octane expenses.
An HELOC is offered at a lower rate of interest with a longer repayment period. Moreover, these funds are tax deductible, unlike other credit lines.
Irrespective of the line of credit your small business requires, we at Fund.Do are looking forward to assist you and fulfill all your financial desires!