Owning a business is a challenge. As a small business owner, you’re bound to encounter a financial hurdle like restricted cash flow or sudden business expenses that threaten to throw your short- and long-term objectives off course. A business line of credit is instrumental for business owners who need to secure funds to cover their short-term needs and improve their long-term financial standing.
Small business lines of credit can be opened with traditional or online lenders and have features that set them apart from ordinary small business loans. Keep reading to learn what a business line of credit is used for and how you can secure a line of credit for your organization.
A line of credit is similar to a business credit card. When you open a line of credit, you can draw money from your line when needed. You only pay interest on the amount you’ve borrowed, and your funds are replenished as you pay back what you’ve borrowed.
You can apply for either a secured or unsecured business line of credit. A secured line of credit uses collateral as protection against your loan. If you fail to repay your loan amount, the lender can claim your collateral to cover the debt. An unsecured line does not require collateral but can be more challenging to qualify for and more expensive to pay back. In many cases, you can expect a higher interest rate and a smaller amount of money compared to a secured line.
Opening a secured or unsecured business line of credit can improve your financial mobility and help you bridge the gap between your cash flow and your core objectives. You can apply for a credit line to help you:
- Purchase inventory
- Plan and implement a marketing strategy
- Repair or purchase new office equipment
- Bridge a seasonal cash flow gap
Most small business owners pursue a business line of credit to cover short-term funding needs. Lines of credit offer the cash needed to finance business expenses like payroll or equipment maintenance. When you’re experiencing a lull in business due to off-season demand, a secured or unsecured line of credit can provide the working capital you need to make ends meet.
You should pursue a business line of credit when you:
- Need extra cash flow
- Need quick access to funds
- Have clients who don’t send payments on time
- Are dealing with short-term business expenses or unexpected costs
Lenders set your credit limit and interest rate based on critical factors like how long you’ve been in business, your current credit profile, and annual revenue. The application process can vary from lender to lender. Discovering a lender who offers you fair terms and doesn’t bog you down with prerequisites and documentation requests takes patience and a lot of research.
Many lenders require small business owners to be active for at least six months before applying for a line of credit. You may also need at least $25,000 in annual revenue to prove you can pay your loan back on time and in full. To improve your chances for a successful application process, ensure you have a strong credit profile and a presentable financial record.
Here are a few more tips for finding the right business line of credit for your organization:
Most commercial banks and credit unions offer business lines of credit, in addition to online lenders. Traditional lenders tend to have more involved application processes requiring more documentation and comprehensive screening. Online lenders, however, may have fewer obstacles to clear. Before setting up the first meeting, you must practice due diligence and research any potential lender. Gather an idea of how your appointment may go and understand what you’ll need to apply successfully.
Collecting all the basic information and documentation your potential lender will request before you meet with them can save you time and a headache. Research your lender and determine what you may need for the first, second, and even third meeting. Also, be prepared to discuss these documents at length—your lender may ask about the details of your financial situation, which may be difficult to provide if you haven’t prepared beforehand.
Be prepared to offer and discuss:
- Tax returns
- Business License
- Recent bank statements
- Financial documents like annual revenue and cash flow
You should secure a line of credit when your finances are in top shape. Pursuing a credit line when you have a restricted cash flow can be frustrating, as you’re more likely to qualify for a line with excellent terms when your financial situation is stable than when you’re stressed. You’re only responsible for repaying the interest on the amount you use. If you secure a line of credit now, it’ll be there when you need it.
Qualifying for a business line of credit with beneficial terms is challenging alone. You need to dedicate time to research and ensure you have everything your potential lender needs to send you through the application process.
The interest rates on secured and unsecured business lines of credit can differ dramatically depending on current market trends and who you decide to contact. You should understand the financial landscape and compare lenders before you apply.
Your time is precious. QualiFi saves you the effort by helping you establish a flexible, revolving line of credit. We offer a wide variety of business lines of credit for small business owners nationwide. Whether you need help covering expenses or bridging costs for your short-term projects, we’re ready to provide the working capital you need.
Ready to secure funds the quick and easy way? Reach out today.