Published By Janet Gershen-Siegel at November 15th, 2018
Business Credit Line vs Loan – what’s the difference? We untangle these similar types of funding and also give you the skinny on business credit cards. But first let’s talk credit lines.
A credit line, or line of credit (LOC), is an agreement between a borrower and a financial institution or private investor that establishes a maximum loan balance that a borrower can access.
A borrower can access funds from their line of credit at any time, provided they don’t go beyond the maximum set in the arrangement, and as long as they meet all other conditions of the finance institution or investor including making timely payments.
Credit lines furnish many distinct benefits to borrowers which include convenience. Borrowers can make use of their line of credit and only pay interest on what they use, compared with loans where they pay interest on the sum total borrowed.
Credit lines can be re-used, so as you acquire a balance and pay that balance off, you can use that accessible credit again, and again.
Credit lines are revolving accounts similar to credit cards, and compare to various other forms of financing including installment loans. Often lines of credit are not secured, much the same as credit cards are. There are some credit lines which are secured, and hence easier to be granted
Credit lines are the most typically sought after loan type in the business world although they are very popular, true credit lines are unusual, and difficult to find. Many are also very tough to get approval for requiring good credit, good time in business, and good financials.
But there are other credit cards and lines which few people know about that are attainable for startup companies, poor credit, or even if you have absolutely no financials.
Most credit line types that most entrepreneurs picture come from conventional banks and conventional banks use SBA loans as their principal loan product for small business owners.
This is due to the fact that SBA ensures as much as 90% of the loan in the case of default. These credit lines are the most difficult to qualify for because you must qualify with SBA and the bank.
There are two fundamental kinds of SBA loans you can commonly secure. One type is called CAPLines. There are actually 5 types of CAPLines that can work for your business.
You can also get a smaller loan amount more quickly using the SBA Express program. The majority of these programs offer BOTH loans and revolving lines of credit.
From the SBA … “CAPLines is the umbrella program under which SBA helps business owners meet short-term and cyclical working capital needs”.
Loan amounts are on offer right up to $5 million. Loan qualification requirements are the same as for other SBA programs.
This line advances against anticipated inventory and accounts receivables. It was designed to help seasonal businesses. Loan or revolving types are available.
This line finances the direct labor and material cost associated with performing assignable contracts. Loan or revolving are available.
This line is meant for general contractors. Or it’s for builders constructing or renovating commercial or residential buildings. This line is used to pay for direct labor-and material costs, where the building project serves as the collateral. Loan or revolving are offered.
For businesses not able to meet credit standards associated with long-term credit. Funding for cyclical growth, recurring and/or short-term needs. Repayment comes from converting short-term assets into cash.
Businesses continually draw from the LOC, based on existing assets, and repay as their cash cycle determines. This line typically is used by businesses that furnish credit to other companies.
This is an asset-based revolving line of credit of up to $200,000. It functions like a standard asset-based line except that a number of the stricter servicing requirements are waived, providing the business can consistently show repayment capability from available resources for the full amount.
The SBA Express program offers access to a credit line for well-qualified borrowers
You can get approval for as much as $350,000. Interest rates can be different, with SBA enabling banks to charge as much as 6.5% over their base rate.
Loans over $25,000 will call for collateral.
To get approval you’ll need great personal and business credit. Plus the SBA says you must not have any “blemishes” on your report.
You’ll need good bank credit. An acceptable bank score demands you have at least $10,000 in your account over the last 90 days. You’ll likewise need a resume showing you have business sector experience and a well put together business plan.
You need three years of company and personal tax returns. Also, your business returns should show a profit. And, you’ll need a recent balance sheet and income statement, therefore showing you have the cash to repay the loan.
To get approval you’ll need account receivables, but just if you have them. When it comes to the collateral to offset the risk, ordinarily all business assets will be taken as collateral, and some personal assets including your home.
It’s not uncommon to need collateral equal to 50% or more of the loan amount. You also need articles of incorporation, business licenses, and contracts with all third parties, and your lease.
Private investors and alternative lenders also offer credit lines. These are less complex to qualify for than conventional SBA loans. They also require much less documentation for approval. These alternative SBA credit lines often need good personal credit for approval.
Unlike with SBA, many of them don’t necessitate good bank or business credit approval. Nearly all of these sorts of programs call for two years’ of tax returns. Tax returns must show a profit. Rates can vary from 7% or more and loan amounts extend from $25,000 into the millions.
Loan amounts generally have a basis in the revenues and/or profits shown on the tax returns. At times lenders may want other financials including a profit and loss statement, balance sheets, and income statements.
Merchant cash advances have quickly become the most popular way to get financing, in large part due to the easy qualification process. Businesses with $10,000 in profits can get approval, with the business owner having scores as low as 500.
Some sources have now even begun to offer credit lines that accompany their loans. You will have to have at least $10,000 in revenue for approval. You ought to be in business for at least one year, although three years is preferred. Lenders typically want to see a credit score of 650 or higher for approval.
Loan amounts are typically around $20,000. Lenders normally do pull your business credit, so you must have some credit already established and in some cases lenders will want to see tax returns. Rates differ based on risk for this program, and there usually are not a lot of funding sources who offer it.
You can get financing despite personal credit if you have some type of stocks or bonds. You can also get approval if you have somebody intending to use their stocks or bonds as collateral for financing.
Personal credit quality doesn’t matter as there are no consumer credit criteria for approval. You can get approval for as much as 90% of the value of your stocks or bonds.
Rates are generally lower than 2%, making this one of the lowest rate credit lines you’ll ever see. You can nevertheless earn interest as you commonly do on your stocks and bonds.
Credit cards frequently offer 0% intro rates for up to two years. So this is very helpful for startups in particular.
Credit lines allow you to take out more cash at a more affordable rate than do cards. These are the primary two differences which will affect you between credit cards and credit line.
Investopedia even says that “lines of credit are potentially useful hybrids of credit cards.”
Both cards and lines are revolving credit. Credit lines are harder to get approval for as card approvals are usually very fast, many times automated, while line require an in-depth underwriting review.
Lines usually offer lower rates, per Bankrate card rates average 13% while lines average 4%.
Most of them report to the consumer credit reporting agencies. They all need a personal guarantee from you. You can get approval normally for one card max as they stop approving you when you have two or more inquiries on your report.
Most credit card companies feature business credit cards including Capital One, Chase, and American Express. These have rates similar to consumer rates and limits are also similar. Some report to the consumer reporting agencies, some report to the business bureaus.
Approval requirements resemble consumer credit card accounts.
Generally, when you apply for a credit card you put an inquiry on your consumer report. When other lenders see these, they will not approve you for more credit due to the fact that they don’t know how much other new credit you have lately obtained.
So they’ll only approve you if you have no more than two inquiries on your report within the last six months. Any more will get you declined.
With unsecured business financing, you partner with a lender who focuses on securing business credit cards. This is a very rare; very little know of program which few lending sources offer. They can generally get you three to five times the approvals that you can get on your own.
This is because they know the sources to apply for, the order to apply, and can time their applications so the card issuers won’t reject you for the other card inquiries. Individual approvals oftentimes range from $2,000 – 50,000.
The result of their services is that you often get up to five cards that mimic the credit limits of your maximum limit accounts now. Multiple cards generate competition, and this means you can get your limits raised frequently within 6 months or fewer of your original approval.
Approvals can go up to $150,000 per entity like a corporation.
With UBF they actually get you three to five business credit cards that report just to the business credit reporting agencies. This is huge, something most lenders don’t offer or advertise. Not only will you get cash, but you build your business credit as well so in three to four months, you can then use your recently established business credit to get even more money.
The lender can also get you very low introductory rates, regularly 0% for 6-18 months. You’ll then pay normal rates after that, typically 5-21% APR with 20-25% APR for cash advances. And they’ll also get you the best cards for points. So you get the very best rewards.
Much like with anything, there are significant benefits in teaming up with a source who focuses on this area. And the results will be much better than if you attempt to go at it on your own.
You need to have excellent personal credit now, ideally 685 or better scores, the same as with all business credit cards. You shouldn’t have any negative credit reported to get approval, you must also have open revolving credit on your consumer reports right now and you’ll need to have five inquiries or fewer in the most recent six months reported.
All lenders in this space charge a 9-15% success based fee and you only pay the fee off of what you secure. Remember, you get a ton of extra perks and about three to five times more money through this program than you’d get on your own. So this is why there’s a fee, the same as all other lending programs.
You can get approval using a guarantor and you can even use numerous guarantors to get even more money. There are likewise other cards you can get utilizing this same program but these cards only report to the consumer reporting agencies, not the business reporting agencies.
They are consumer credit cards as opposed to business credit cards.
They provide similar benefits including 0% intro APRs and five times the amount of approval of a solitary card but they’re much easier to qualify for.
You can get approval with a 650 score and seven inquiries (or fewer) in the most recent six months and you can have a bankruptcy on your credit, and other derogatory items. These are much easier to get approval for than UBF business cards.
With all preceding cards, you ought to have good consumer credit in order to get approval but what happens if your personal credit is not good, and you don’t have a guarantor?
This is the time when building corporate credit makes a great deal of sense regardless of whether you have good personal credit, establishing your business credit helps you get even more money, and without a personal guarantee.
Corporate credit is credit in a business name, that’s associated with the business’s EIN number, and not the owner’s Social Security Number. When carried out correctly, company credit may be acquired without a personal credit check and without a personal guarantee – a thing all other cards talked about can’t deliver. You can get three types of corporate credit cards. Vendor credit offers net 20 terms used to set up a business credit profile.
With retail credit, get credit cards with high limits at most stores. And with cash and fleet credit, get Visa, MasterCard, American Express cards you can use anywhere.
You can get these without any credit check or guarantee. Limits are normally $5,000 – $10,000 to begin, and can exceed $50,000.
Your best financial decisions will depend on your credit scores, your company’s needs, and the terms you need. Only you can make this decision.