Business lines of credit help entrepreneurs to build their businesses, one line draw at a time. If you want to grow your company through its various stages, accessing this type of funding product may be the answer.
Today, we’d like to share important information about what business lines of credit are and how they may be used to keep business operations running smoothly. These lines of credit give business owners the flexibility to use capital, whether it’s used for expansion and growth or simply to assist with cash flow during an emergency.
What Is a Business Line of Credit?
This form of credit allows a business owner to utilize funds when he or she needs to. Most lines of credit charge a fixed fee per month of utilization, allowing you to access funds as needed and then repay at your discretion…unlike a business a loan which has a maturation date and full term. Typically, revolving lines of credit are utilized for operating expenses (which tend to go up and down monthly) or growth opportunities.
When looking for a business line of credit, there are a few things to consider:
- Look for a lender which offers this line of credit with monthly payments.
- Ask if there is a drawdown fee for an addition to the interest or fee cost.
- Make sure you do not have any pre-payment penalties.
- Ask if the line of credit is reported to the credit bureaus
- Make sure the line of credit revolves.
- What are the approval requirements for this lender?
We feel that the monthly payment setup is most appealing because you’ll then pay a flat fee each month. The flat fee system will grant you the flexibility to access as little or as much money as you want to…and then pay only for the time frame that you use the money for, not the entire line you have access to.
For example, if you pay back what you’ve used in a single month, you’ll only be charged a single month’s fee.
This type of credit line “revolves” because the line of credit will be refilled to its initial amount as soon as you’ve made a payment. Then, you’ll be free to draw down on it again. Very similar to a credit card but allowing you access to cash.
How Will It Build Your Business?
With a revolving line of credit, you’ll be able to solve many common cash flow problems such as:
- Pay for a large, unexpected expense that you didn’t take into account
- Invest in more inventory
- Cover payroll or taxes
- Advertising and marketing
- Pay off credit cards or other debt
There are many reasons why having access to capital in your back pocket is important. Most of our clients use them to cover slow-paying clients, rising supply costs, and business downturns.
You may also use a revolving line of credit to grow your company. If you want to hire new employees, buy new equipment which boosts efficiency or invest in marketing which improves brand recognition and sales, you’ll have the funds that you need to spark significant growth at your disposal.
What is Needed to Qualify for a Business Line of Credit?
Every institution is different but, with the evolution of Fintech, many alternative lenders offer lines of credit or line of credit product with their own fine-tuned requirements.
At the very least through our experience we have noticed bare minimum requirements of the following:
- 540 Credit
- 1 year in business
- 50,000 gross annual sales
- Less than 3 negative days in the business account in the last 60 days.
The key to success is first coming up with a plan for the capital and then finding a lender which understands your needs and can grow with you.
About the Contributor:
Chad Otar is the CEO at Excel Capital Management, a pioneer in the Fintech and alternative lending space. He has assisted thousands of business owners to receive funding over the last 5 years and is focused on helping one small business at a time achieve access to capital