About Business Lines of Credit
A Business Line of Credit is a revolving line that gives a business access to funds for a set term, typically 18 months or less. A business can draw funds from the line throughout the term and only pay interest on what is drawn upon. For example, if a business is approved for a $50,000 line of credit and draws $20,000, the business pays interest on just the $20,000 not the full line. Business Lines of Credit are one of the most flexible loan structures available. Business owners are given some control over term, amount, and total cost of financing based on how long they take to repay the draw.
Business Lines of Credit can be great safety nets to have in place before needed since approval times typically take 1-2 weeks, but once a line is established draws can be done within 24 hours. Rates, terms, and requirements can vary depending upon the lender. Some lenders require additional collateral and the majority will require a blanket lien on assets which can impede a business’s ability to obtain additional loans.
Benefits of Business Lines of Credit
Flexibility – Business Lines of Credit are extremely flexible and enable business owners to use the funds where their business needs them most.
Interest Rate – Rates vary greatly with lines of credit, but only paying interest on what a business uses can often save the borrower money in the long run.
Drawbacks of Business Lines of Credit
Blanket Lien – Business Lines of Credit often require a blanket lien and can limit a business’s access to additional financing while the line is active.
Hidden Fees – Be aware of hidden annual, draw, and non-usage fees. Ask your lender upfront for all fees, not just the rate. A higher rate does not always translate to a higher cost of financing.
Hard to Qualify – Business Lines of Credit have some of the strictest requirements for qualifications.
The exact loan requirements will vary depending on industry, loan amount, and time in business.
Ownership – All owners with 10% or greater ownership will typically be required to be a personal guarantor.
Bureau Scores – Personal Credit of at least 600 for the most qualified guarantor, preferably 700+.
Major Derogatories – Bureau reports stating open tax lien and judgements, unpaid collection accounts, and charge-offs/repossession may limit the applicant’s financing options.
Revenue – Monthly deposits into the business checking account of at least $10k.
Time in Business – A minimum of 1 year is business is required, preferably 2+.