A business line of credit can give your company quick access to revolving credit. And though you may find business credit cards to be equally convenient, you might see lower interest rates, fewer fees, and more flexible repayment terms with a line of credit.
You might receive one of two different types of lines of credit: unsecured or secured.
An unsecured line of credit doesn’t require any type of collateral: just your personal guarantee.
A secured line of credit, on the other hand, requires you to use some type of property as collateral. In the event you default on your payments, your lender can use your collateral as payment towards whatever you owe.
Since a secured line of credit is less risky for lenders, you may qualify for better rates and repayment terms than you would with an unsecured loan.
At the same time, you should be willing to lose whatever property you use as collateral in case the unforeseen happens and you can’t make your payments.
What's the Total Cost?
The biggest cost involved is interest.
The amount you’ll pay depends on a number of factors, including the strength of your application and the lender you choose. Rates can start as low as 7% and go as high as 60%.
You might also encounter origination fees, draw fees, and maintenance fees depending on the lender.
Only Pay Interest on Funds Drawn
The most notable benefit is that you only pay interest on the funds you actually draw from your account, saving you money over time.
This is because you won’t have to go through the process of estimating what a business expense might cost you, then adding in a buffer to your loan request just in case something goes over budget.
With a corporate credit line, you can wait until you actually need to use the money and only take out money when you’re ready to pay for a bill.
You don’t end up paying interest on money you didn’t end up using.
Funds Can Be Available When You Need Them
The next big advantage of getting a business line of credit is timing.
Rather than waiting for an emergency and then applying for a loan, you could have funds readily available.
Plus, you may not need a specific purpose with a line of credit. The funds might simply be used for whatever working capital you need.
This can provide you with a lot of flexibility to help your cash flow and your balance sheet.
Could Build Your Business Credit
Some lenders report your timely payments to the credit bureaus, which builds your positive credit history.
And with payment history accounting for the largest percentage of your credit score, you could quickly start seeing results.
Disadvantages of Business Lines of Credit
While there are a lot of advantages, this type of short-term financing comes with its own set of disadvantages too.
For one, you may be required to provide your lender with updated financials on your business when you’re ready to draw on your account.
It may be cumbersome, but it reassures your lender that your business is still viable and able to make the repayments.
Offering Up Collateral
As mentioned earlier, you may also be required to provide collateral for a new line of credit.
The kind of collateral accepted varies lender by lender, but typically you can use personal property like a vehicle or boat, a savings account, or sometimes inventory or other assets.
Variable Interest Rate
Small business lines of credit also use a variable rate rather than a fixed rate.
Often it’s calculated as the prime rate plus an additional number of percentage points.
If the prime rate changes, your interest rate correspondingly changes as well.
On Demand Status
Another feature of lines of credit is what’s known as “on demand,” which allows your lender to close your line of credit at will and require your balance to be paid within 30 to 90 business days.
It’s important to use your line of credit strategically so that you’re not overburdening your financial situation.
Higher Interest for Poor Credit
Finally, as with any type of financing solution, you’ll pay more if you have bad credit.
While that can be good news because you actually can get a line of credit for bad credit, you should still realize that your interest rate will undoubtedly be higher compared to someone with a strong credit history.
How To Qualify
Obtaining a line of credit can be an easy process if you’re organized and prepare your information ahead of time, rather than scrambling for documents as your lender requests them.
While you’ll have a better chance of qualifying if you have a more established business and a good credit history, it’s still possible to get a line of credit if your business credit history is less-than-impressive.
Do you qualify?
Time in Business
At least 1 year in business
Credit Score > 600
Advanced AI technology connects you with funding solutions
Potential for multiple loan offers in one application
Persons facing serious financial difficulties should consider other alternatives or should seek out professional financial advice. This website is not an offer to lend. Lendgenius.com is not a lender or lending partner and does not make loan or credit decisions. Lendgenius.com connects interested persons with a lender or lending partner from its network of approved lenders and lending partners. Lendgenius.com does not control and is not responsible for the actions or inactions of any lender or lending partner, is not an agent, representative or broker of any lender or lending partner, and does not endorse any lender or lending partner. Lendgenius.com receives compensation from its lenders and lending partners, often based on a ping-tree model similar to Google AdWords where the highest available bidder is connected to the consumer. Regardless, Lendgenius.com’s service is always free to you. This service is not available in all states. If you request to connect with a lender or lending partner in a particular state where such loans are prohibited, or in a location where Lendgenius.com does not have an available lender or lending partner, you will not be connected to a lender or lending partner. You are urged to read and understand the terms of any loan offered by any lender or lending partner, and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you. By submitting your information via this website, you are authorizing Lendgenius.com and/or lenders and lending partners in its network or other intermediaries to do a credit check, which may include verifying your social security number, driver license number or other identification, and a review of your creditworthiness. Credit checks are usually performed by one of the major credit bureaus such as Experian, Equifax and Trans Union, but also may include alternative credit bureaus such as Teletrack, DP Bureau or others. You also authorize Lendgenius.com to share your information and credit history with its network of approved lenders and lending partners. For qualified consumers, our lenders offer loans with an Annual Percentage Rate (APR) of 35.99% and below. For qualified consumers, the maximum APR (including the interest rates plus fees and other costs) is 35.99%. All loans are subject to the lender’s approval based on its own unique underwriting criteria. Example: Loan Amount: $4,300.00, Annual Percentage Rate: 35.99%. Number of Monthly Payments: 30. Monthly Payment Amount: $219.36. Total Amount Payable: $6,581.78 Loans include a minimum repayment plan of 12 months and a maximum repayment plan of 30 months. In some cases, you may be given the option of obtaining a loan from a tribal lender. Tribal lenders are subject to tribal and certain federal laws while being immune from state law including usury caps. If you are connected to a tribal lender, please understand that the tribal lender’s rates and fees may be higher than state-licensed lenders. Additionally, tribal lenders may require you to agree to resolve any disputes in a tribal jurisdiction. You are urged to read and understand the terms of any loan offered by any lender, whether tribal or state-licensed, and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you.
Lender’s or Lending Partner’s Disclosure of Terms.
The lenders and lending partners you are connected to will provide documents that contain all fees and rate information pertaining to the loan being offered, including any potential fees for late-payments and the rules under which you may be allowed (if permitted by applicable law) to refinance, renew or rollover your loan. Loan fees and interest rates are determined solely by the lender or lending partner based on the lender’s or lending partner’s internal policies, underwriting criteria and applicable law. Lendgenius.com has no knowledge of or control over the loan terms offered by a lender and lending partner. You are urged to read and understand the terms of any loan offered by any lenders and lending partners and to reject any particular loan offer that you cannot afford to repay or that includes terms that are not acceptable to you.
Late Payments Hurt Your Credit Score
Please be aware that missing a payment or making a late payment can negatively impact your credit score. To protect yourself and your credit history, make sure you only accept loan terms that you can afford to repay. If you cannot make a payment on time, you should contact your lenders and lending partners immediately and discuss how to handle late payments.