Line of Credit – What It Is and How to Get One

Guest post by Rich Jones.

Running a small business is challenging, but can also highly rewarding.  For those brave souls who take the risk of launching a new business venture, there’s an awful lot to learn.  Most small businesses need financial help at one time or another, whether to support growth or just manage cash flow, in the form of small business funding.

There are several different small business funding options to choose from, so it’s important to learn all you can about them and their ideal use.  One of the most appealing forms of small business funding for many small businesses is a line of credit.

A business line of credit can provide many benefits, chief among them financial flexibility for small business owners.  When properly used, business lines of credit can help small businesses to grow, expand, conduct their operations, and manage their cash flow, ultimately leading to success.

This post sheds some light on business lines of credit.  Specifically, here’s what a business line of credit actually is, how it works; how it differs from other small business funding options like small business loans; and the basic requirements for applying for a line of credit.

What is a Business Line of Credit?

A business line of credit is a form of business funding that provides a facility by which the owner can draw funds against the line as needed.  It’s different than a small business loan, where you receive all of the loan funds as a lump sum upfront.

In this sense, it’s more like a credit card account (though slightly different), in that you are approved for a maximum credit line, but receive no funds upfront.  When you need cash, you draw against the line of credit in any amount, so long as it is less than the credit limit.

You then pay interest only on the outstanding amount you’ve borrowed, and repay the principal and interest over time.  During this time, you can draw additional funds down from the line of credit, provided the total amount outstanding remains below the maximum on the credit line.

You continue to repay and draw against the line of credit on a revolving basis, which is why some lenders also call them revolving credit facilities.

Business lines of credit do differ somewhat from credit cards, however.  Credit cards are used directly for purchases, whereas a line of credit provides cash or electronic funds transfers to a business.

There are also significant differences in the maximum amounts of credit card accounts vs. business lines of credit, as well as the interest rates, which tend to be much lower on business lines of credit than on commercial credit card accounts.

How is a Line of Credit Different from Other Small Business Funding Options?

When it comes to small business funding choices, the most common loan and credit instruments are lines of credit, business credit cards, venture capital funding/equity investment, and various kinds of small business loans, including merchant cash advances or MCA loans.

Venture capital funding, or equity investment, is usually a more permanent form of small business funding.  Typically, venture capital firms or outside investors buy a stake (equity) in the company, and gain some kind of control and/or a share of future profits.

While it’s an excellent way for many entrepreneurs to generate start-up funds, it’s trading away potential future earnings for immediate short-term cash, diluting ownership, and possibly even giving up some control.  For those reasons, many small businesses in need of small business funding prefer loans and credit options over equity investment.

Small business loans, including those designed for bad credit customers, debt consolidation, emergency business loans (which may carry a higher interest rate), or merchant cash advances, are all a bit different from each other, and different from a line of credit.  In all cases, they provide a lump sum loan amount to the borrower, which is then repaid over time with interest – either on a fixed calendar schedule or a variable sales-driven schedule.

It’s a once-and-done proposition – you get the money, then repay it over time.  You can’t draw against the loan again as you can with a line of credit, or adjust your balances up or down on a revolving basis.  It’s more predictable in terms of budgeting your repayment and outstanding amounts, but far less flexible than using a business line of credit.

How Can I Apply for a Business Line of Credit?

If you’re interested in obtaining a business line of credit, you’ll need to choose a lender, and be sure you meet their minimum eligibility requirements for the particular line of credit product you’re after.  In almost all cases, small businesses will have more luck getting approved for a business line of credit from a private, non-bank lender than a bank or financial institution.

These private lender organizations are much more risk-tolerant than banks, and are generally designed to specifically serve the small business community and their small business funding needs.  As a result, they often have lower credit score requirements, and much more approachable time-in-business and revenue requirements in order to qualify for a line of credit.

Of course, every lender is different, and it’s always best to fully review the business line of credit application and business line of credit terms at your chosen lender, to be sure you’re getting a deal that makes the most sense for you and your business. For instance, in order to qualify for a line of credit at BizFly Funding, one of the premier private small business lenders in the US, you need to meet the following criteria:

• You need to have been in business for at least six months as of the time of your application.
• You need a credit score of 650 or greater (this is generally somewhat higher than other small business funding options, since the flexibility of use requires greater financial management skills than a simple small business loan, for example).
• You need to generate at least $10,000 in revenue per month, with higher limits typically required for larger lines of credit.

If you meet these requirements, you can be eligible for a business line of credit up to $250,000, at highly competitive interest rates ranging from 5% to 10% – less than half of the average credit card account interest rate.

Frequently Asked Questions about Lines of Credit

What’s needed to open a business line of credit?

As mentioned above, requirements for a business line of credit will vary from lender to lender, though generally involve a credit score, a certain time in business to demonstrate stability, and a certain minimum monthly revenue requirement.  Business lines of credit can be secured, meaning they also require collateral, or unsecured, which don’t require collateral.

What’s the best business line of credit?

After carefully analysis, you will probably conclude that an unsecured business line of credit is the best choice for most small businesses.  That means your assets will be safe, and the risk is higher for the lender than for you.

Just make sure to research the available offers to find the one that offers the best rates, the most flexibility, and ease of approval for the majority of small businesses over the competition.

How can I get a business line of credit with bad credit?

For some lenders, the minimum credit score for a business line of credit is 650. It is a higher credit score requirement than some other financial products, such as traditional small business loans, which are available for businesses with credit scores 100 or more points below the line of credit requirement.

If you do not qualify for a line of credit with your current credit score, a small business loan or merchant cash advance might be a better choice, and can help you to build your credit score through use and repayment, thus enabling you to qualify for a business line of credit in the future.

How do I qualify for a business line of credit?

See above on the minimum requirements to be met for a business line of credit application at BizFly Funding to get a general idea, but different lenders may have additional requirements.

What is a revolving line of credit?

A line of credit is sometimes called a revolving line of credit, or revolving credit facility. This is because it is flexible with regards to how much you draw against the line, how much you repay, and allows you to draw against it again, up to the credit limit, as you need.

Much like a credit card offers a revolving balance, with a business line of credit, you pay off a minimum amount, or more if you prefer, and can carry a small or large balance as you see fit.

Rich Jones is a writer based in California, with an expertise in technology, regulatory affairs, health, and finance.  With over a decade of experience in both corporations and start-ups, as well as his personal struggles with health, he’s developed a unique insight and voice.  He’s written or ghost written for a number of major publications and leading companies and websites. Rich also contributes to a number of blogs that cover finance, technology, and other topics, such as LifeGuideBlog, BizFly Funding, and FocusOnVR.