Securing a business line of credit loan is challenging enough. Many business owners track down the credit line they need but feel stuck taking the next step. If you’re unsure how to use your business line of credit loan, this guide can help! In it, we’ll break down how a business line of credit works, how to secure a credit line, and our rules for how to best use it.
A business line of credit is a program that lets a business borrow a certain amount of money (up to a specified threshold) and charges interest only on what’s actually borrowed. Where a traditional loan involves acquiring a lump sum of money that you pay back with interest over time, a line of credit is a much more flexible option that lets your business borrow as needed without incurring extra interest.
One of the best ways to understand a business line of credit is by comparing it to a credit card. Like a credit card, a line of credit only charges your business interest on what’s actually borrowed. In contrast, a traditional loan gives you a lump sum and requires you to pay it back (with interest) through scheduled payments.
A business line of credit lets you draw from an open credit line as needed. As the money and interest are paid back, the available funds are replenished. The pool of money available to pull from depends on your business partner, but having more money is always preferable, as it lets your business adapt to more situations.
The funds can be accessed in numerous ways, but the most common methods include:
- Business Checking Accounts
- Credit Cards
- Mobile Apps
There are two types of credit lines:
Secured Lines of Credit: This uses collateral that you own as a guarantee for your loan. If you fail to pay back your loan, the lender will seize that collateral to satisfy the outstanding debt you could not pay.
Unsecured Lines of Credit: Because it doesn’t use collateral, it is harder to acquire and charge higher interest rates because it’s riskier for the lender.
The right choice for you will depend on your business’s needs.
There are numerous sources where you can acquire a credit line. Lines of credit are offered by banks, credit unions, online lenders, and alternative financiers. However, more traditional sources are preferable, as they’ll typically offer lower interest rates.
Just because tracking one down is tough, don’t jump on the first credit line opportunity you get! Every business line of credit offers different credit limits, interest rates, loan amounts, lending fees, and more. Carefully examine every option available before accepting a loan.
Wondering about that application process? A lender will examine your business before deeming you suitable for a loan. Common requirements for applying for a business line of credit include:
- A minimum business age of six months
- A minimum annual revenue
- A suitable credit score
Outside of these general requirements, you need to make sure that your business has some collateral to offer for every secured line of credit you apply for. Failing to present suitable collateral automatically makes your business ineligible for all secured credit lines.
Tracking down a line of credit that meets your specific needs can be tough. Have you struggled acquiring the right credit line? If so, you may not have been looking in the right place. Explore QualiFi to discover a full range of credit options.
Now that you better understand how a business line of credit works and how you can secure one, let’s examine how to use a credit line responsibly.
How many lines of credit does your business currently have open? Too many business owners assume that one line of credit open from a reliable source is all they need. However, relying on a single lender leaves your business with nowhere to go if that relationship deteriorates. Lines of credit are structured very differently from how they used to be in years past. Lenders can and will drop businesses off their lines of credit at the drop of a hat if they have the slightest suspicion that they’ll fail to make payments.
If you rely on a single line of credit, do you have a plan for what to do if that line of credit gets shut down? If not, you need to start forming multiple partnerships with banks and other lenders that can extend you a line of credit if your existing one falls through.
Too many business owners fail to leverage the unique advantages of a credit line and instead use them as alternative term loans. Keep in mind that you only pay interest on money that is currently withdrawn from the line of credit. This means that credit lines are ideal for businesses struggling with working capital that need additional help with their short-term finances.
Remember to only use your credit line for things you’re confident you can pay back quickly!
A credit line is an excellent opportunity to build your business’s credit rating. Stay responsible and punctually pay back all of the money you borrow. While prompt recompense makes your existing line of credit less advantageous, it’s crucial for building your credit score and securing higher-quality loans and lines of credit down the line.
Remember that debt is a tool. When used correctly, it shouldn’t impede your business, but should help you grow.
QualiFi has been helping businesses secure the financing they need for years. Whether you need assistance funding purchase orders or securing a straightforward small business loan, we can help. Contact us today to secure the financing your business needs.