When running a business, there may come a time when you could use extra funding. Whether it is to buy new equipment, hire new employees, conduct training programs or launch a new product, there is a need for financial resources. Businesses have several options available to them to get the extra funds, each with their own share of pros and cons.
&Solved offers line of credit option that you can use to provide funding for your business activities when compared to other types of funding, like bank loans and Angel Investors, it does have a few advantages. Before applying for a line of credit for a business, it is better to understand what exactly a business line of credit is, the requirements and the cons along with the pros.
We’ve also a page about comparing a line of credit with other funding products.
What is a Business Line of Credit?
A business line of credit is similar to a line of credit but is used for the purpose of running a business. A representative of the business applies for the line of credit, but the amount that is allocated can be used for whatever the business requires or even just to keep a reserve of extra funds in case of an emergency.
Unlike a loan where a lump sum amount is transferred to the recipient’s account, a line of credit holds the funds in reserve. When a withdrawal is made, the required amount is transferred to the recipient’s account within 24 hours.
With a loan, the recipient is required to pay back the full amount with interest in instalments over a period of time. With a line of credit, only the amount that has been withdrawn is charged interest and has to be paid back. The amount that remains in reserve is not charged any interest.
As withdrawn amounts get paid back, the value of the funds in reserve gets reset to its original amount. The recipient can keep drawing on these funds as often and for as long as required provided that it is within the allocated limit and within the set time duration.
When it comes to small business loan alternatives, a business line of credit is one of the most flexible options available. The upper limit is usually less than what you can get with a loan and set at $30,000, but the acquisition procedure is more simplified and much faster. For more information view out our guide on how to apply for small business credit.
How Does a Business Line of Credit Work?
A business itself cannot apply for a line of credit but the founder, director or CEO can apply on its behalf. The applicant needs to provide all the required details to &Solved, after which an assessment will be carried out. The assessment will help determine if you are eligible for a line of credit and up to what amount. The process usually takes up to 24 hours.
Once the application has been approved and the amount fixed, the applicant is eligible to withdraw funds from the business line of credit. The maximum amount that can be withdrawn is pre-fixed depending on several criteria including how the business has been performing over the last two years, loan history, credit score and so on. A minimum amount of $2,000 has to be made during the first withdrawal followed by minimum amounts of $1,000 each. Withdrawals can be made for as long as funds remain in the line of credit or until the duration expires.
The amount that has been withdrawn has to be paid back with interest. Interest is charged only on what has been withdrawn from the line of credit and not the full amount that has been allocated to the applicant. The time duration during which the payments have to be made will be decided when allocating the line of credit. The full amount or minimum amount can be paid by the deadline. Paying the minimum amount only means that interest will continue to be levied on the balance amount until it is paid back in full. There is no penalty for paying back the full amount early.
When To Use A Business Line of Credit
A line of credit is a great asset for businesses whose expenses typically remain the same but whose influx of cash flow varies from month to month. If you frequently have high and low influx months and have to borrow money, frequently applying for business loans can be a hassle. Credit card fees and interest rates can cause your small company to struggle.
With a line of credit, you don’t have to fill out a loan application every time cash is short. Instead, you can withdraw the cash you need. You’ll have access to the money you need to cover expenses or purchase materials for your business. Best of all, you will only need to pay interest on the amount you borrowed. Here are some strategies on when you should use your credit line:
- Your line of credit will give you access to funds on months that your business doesn’t meet the sales it needs to pay the necessary expenses. Only withdraw the amount you need up to your credit limit. You can pay back the borrowed funds in future months when you have better cash flow.
- Access funds from your credit line when you need to cover emergency expenses for your business. While business owners often plan in advance for these events, they don’t always have the working capital they need to cover the necessary expenses. Having quick access to a source of cash can save you a lot of anxiety so that you can return to work and focus on your productivity.
- Occasionally your business may receive an order that you can’t fill with available product. Using cash flow form a line of credit will allow you to invest in the materials you need to create the products for your clients.
Acquiring a Business Line of Credit for a Startup
A business line of credit is an asset for startup companies. It will give you the cash flow you need to manage your day-to-day expenses. Business loans can be a hassle, especially in the first few months when your sales are more unpredictable and the interest rate on a credit card can overwhelm a growing business.
A revolving line of credit, on the other hand, allows the business owners of a small business to have more flexibility in what they borrow and use. Additionally, you will only ever need to pay interest on the amount currently borrowed. You don’t have to take out a large lump sum as you would other loans for small business. Instead, only withdraw the amount you intend to use.
In order to receive a line of credit with a reasonable interest rate, you will need to fill out an application with relevant information pertaining to both your business and your personal finances. Upon approval, we will work with you to find appropriate options that would give you the cash flow you would like.
There are many common expenses for start-up businesses, many of which may take more cash than you have on hand. These may include the following:
- Insurance, licensing, and permits – while each of these may be relatively small expenses, they can all add up, taking a good chunk of your seed money.
- Research and Marketing – in order to start out strong, it is important to identify your target demographic so that you can market appropriately to them. Both are necessary expenses for your success.
- Initial Rent/Deposits – if you are renting a studio or storefront for your business, you will need to initially pay a decent amount out of pocket.
- Equipment, materials, and supplies – you will need furniture, decor, good lighting, and other interior elements to make your space attractive to your clientele. Additionally, you will need cash for your initial merchandise.
- Technological expenses – these include any software, systems (including accounting and payroll software, internet, websites, and more.
- Employee salaries and benefits – unless you intend to run your start-up entirely on your own, you will have to factor in the cost of labour.
What are the Requirements For a Business Line of Credit?
It is important for you to note that the business itself cannot apply for credit. Instead, the CEO, founder, or director must fill out an application on the behalf of their company. After submitting relevant details, the application will be assessed to determine the appropriate credit limit for your business.
The following documentation may be requested with your application:
- Credit history
- Business and personal tax returns
- Financial statements for your business
- Details on any open business loans
- Bank account information
- Profit and loss statements
After your application has been accessed, you may be approved for a revolving line of credit. You will be able to withdraw any amount of cash up to your given credit limit. Unlike other business loans, you will only ever need to pay interest on the amount that you borrowed.
The Bottom Line
&Solved offers businesses a convenient alternative to a business loan with its line of credit with no hidden costs. Provided that all the paperwork is in order, the business has been well-established over the past two years and shows the ability to pay the credit back, obtaining a business line of credit is a simplified procedure.
Apply For A Business Line Of Credit Today