As a business owner, you’ll likely face a time when you need to cover unexpected expenses, manage your cash flow differently, or buy new inventory. Taking out a business line of credit can be a perfect option in these circumstances. You borrow up to a certain limit and only pay interest on the money you borrow — it’s a different situation than a term loan. Also, you don’t always need to provide collateral; if the line of credit is on the low side, it’s usually unsecured. Here are some basics you need to know.
It’s important that you have at least a few years of history and consistent revenue in order to satisfy the requirements of traditional lenders (i.e., banks). If you are seeking out larger lines of credit, lenders require collateral, which you surrender if you don’t make payments. Typical documentation you’ll need to provide includes bank account information and financial statements, plus business and personal tax returns. Less traditional lenders usually have more lenient qualifications, though lower credit limits and higher rates are typical.
Around $25,000 in annual revenue and six months in business are usual requirements. If a credit report is requested, you’ll need to have a score of 500 or more.
Credit Lines vs. Credit Cards
You might hear the terms “business credit cards” and “lines of credit” used interchangeably, but they differ in several ways. A business card is more suitable for smaller, ongoing expenses and for businesses that are newer and with less-established finances. Business lines of credit are more appropriate for mature businesses and larger expenses.
Business credit cards can offer rewards or cash back when you spend a certain amount. The rewards usually relate to business expenses, such as gas, internet and cable, and supplies. Often you can obtain a card via a 0% promotion, during which you won’t need to pay any interest on your balance for a certain length of time.
A business line of credit means you have actual cash deposited to your bank account when you make a draw — with a higher credit limit. If it’s a large amount, it’s secured by collateral. If you get cash through your business credit card, you’ll be subject to fees and a higher APR, in addition to late-payment and annual fees.
Securing a line of credit for your business can create more consistent cash flow. Keep these factors in mind as you make your decision.