As a small business owner, do business woes have you feeling a little green? You need a good luck charm to help you turn things around. A business line of credit could be just the thing. These little beauties cover a multitude of sins that could turn into ugly financial issues.
What is a Business Line of Credit?
They aren’t magical, but they can definitely give your small business what may seem like a magical boost. You just have to find the right line, and lender, for your needs.
Also known as a commercial line of credit, this may be just the thing to get you over a hump and turn things around. But what exactly is a business line of credit, and how do you get one?
A line of credit is like a cross between a traditional small business loan and a credit card. It is revolving credit, but it has an interest rate similar to a business term loan. So it is generally accessed by drawing down funds, as needed, through electronic transfer or via a checkbook
There are options for both an unsecured business line or a secured line, generally speaking. Of course, an unsecured business line is likely going to have a higher interest rate, but if you do have or do not want to use collateral, it’s an option.
If you have great personal credit, you can get one from any traditional bank or credit union. If you have awesome business credit, that is even better.
It’s never in your best interest to mingle business and personal finances. Strong personal and business credit allows you to qualify for financing from almost anywhere that offers it.
What if your personal credit is lacking and your business credit is non-existent? Then, it might take a little more time. It is possible though. The key is to get to work now. Do not wait until you need it.
If you have a line of credit in place, you will always have a way to turn things around when bad luck strikes.
How Does A Business Line Of Credit Work?
A small business line of credit is a financing arrangement generally made between a business and a financial institution, although just like a business term loan, the type of financial institution can vary. It may not be a traditional lender.
The big difference between a small business line of credit and a small business loan is that a business line is revolving. It functions more like a business credit card. You have a credit limit, and you use however much you need to as often as you need to.
You only make payments on what you use. So, if you have a credit limit of $10,000 credit line, the entire $10,000 is available to you. But, if you only use $1,000 during a month, you will only make payments on that $1,000, unless or until you make another draw.
After you draw the $1,000, only $9,000 is available to you. However, the amount of principal you pay back each month is added back to the available balance.
There are a number of reasons this is better than using credit cards. The main reason being that a business line of credit is almost always going to have a lower interest rate than a credit card. The credit limit can sometimes be higher as well, depending on a number of factors.
That said, there are usually not the same options for rewards, nor the same online protections for purchases that some credit cards offer.
Business Line of Credit Terms, Interest Rates and Fees
As a revolving credit commercial lending product, you might expect terms, interest rates, and fees similar to credit cards. In reality, this is not typically the case. In fact, most business lines of credit fall somewhere between a small business loan and a business credit card in this area.
Of course, it all varies by lender and the economy, but as a general rule, lines of credit have lower interest rates than credit cards. However, they are higher than most business term loan rates.
For example, while a credit card may have rates upwards of 14 or 15% or much higher, and a term loan may offer a rate of 5 or 6%, a small business line may have an interest rate of around 8 or 9%.
Terms are somewhat different than a credit card as well. A credit card will typically go on indefinitely, while a business line of credit will often be for a set period of time.
You may have a 10-year line of credit. But, renewal may happen automatically. The net effect is the same.
As for fees, it simply depends on the financing product you apply for and get. The goal is to always get the best terms and rates possible while still getting a product that fits your needs.
Sometimes that means paying fees. Whatever the case, be certain you understand the fee structure on your specific product before accepting funds.
Why Not Just Get a Business Credit Card?
Generally speaking, it is good to have both. For some things, a credit card may work better. You have instant access to funds, and there may be other perks such as points or money back. However, for some things you may need the option to finance a larger amount at a lower interest rate.
How can a Business Line of Credit Help?
There are many situations in which a business line of credit can be just the financing option you need to turn things around. They are especially useful to business owners when it comes to cash flow and wealth management.
Just remember you have to pay it back. If you forget that, you could end up in more trouble than you started with.
Sometimes no matter how carefully business owners budget, there is a need for additional working capital. It may not even be an issue that arises from something bad. Maybe you need to add a computer or take advantage of a sale on inventory. You can use your line of credit for that.
Then again, maybe you can see that you are not going to be paid on time for a large invoice, and you need something to bridge the gap in the meantime.
In the first case the funds from the sale of the inventory can repay the draw. In the second, you pay back the draw once the invoice is paid.
For business owners, a line of credit can mean not missing out on a great deal, and it can keep you from falling behind when funds do not arrive as expected.
If you already have a line of credit in place, you can start expansion without having to wait on a long loan application and credit approval process to get the funds.
You can simply start the project, and if you need more funds than the line of credit will handle, work on a larger loan application at the same time.
Repairs and Maintenance
Most of the time these things fall under working capital. However, if you neglect to budget funds for a maintenance project that only happens once a year, which is easy to do, a line of credit could save your hide.
The same is true of repairs. Budgeting for minor repairs is easy, but for larger scale repairs that you do not expect, and that insurance may not completely cover, a line of credit can come to the rescue.
Suppose you need to add an automobile, commercial stove, or a large-scale printer. Those are not cheap. Even if you have the funds on hand to cover one, it could leave you with a shortage of reserves.
A line of credit can allow you to make the purchase you need without an additional loan, and without running into a shortage.
Seasonal Cash Flow Gaps
If you have the sort of business that earns most of its profit during a specific season, it is likely you suffer from a shortage during other times of the year.
A line of credit can help bridge the cash flow gap that shortage leaves, and when your season comes, you can repay the draw.
Unexpected Cash Cash Flow Gaps
When bad luck really hits, you may find you have unexpected cash flow gaps. This is where it is very important to have a line of credit already in place. In these times, there usually isn’t time to go through an entire loan application process.
You need funds fast. A credit card will work, but a line of credit can usually save you significantly in interest costs.
Having a line of credit already in place means you can take these unexpected cash needs in stride. Your business will never skip a beat. Otherwise, you could suffer losses in more ways than one by being forced to shut down operations or fall behind on cash obligations. That’s not in anyone’s best interest.
How to Get a Business Line of Credit
Okay, so you get the idea that you need to have a line of credit in place before you need it. How do you do that? Typically, you apply for a line of credit the same way you apply for a loan.
Banks and other traditional lenders are going to require a good personal credit score to approve funds, but there are some non-traditional lenders that may focus more on your business credit than your personal credit.
That means even if your personal credit isn’t the best, you can still qualify for a line of credit. How do you find the best business line for you?
Business Contact Information
Make sure your small business has a separate business phone number and address, and that it is consistent across the board. Whatever is on file with the Secretary of State should be what is on file with the IRS, and that should be what you use on your loan application.
Get an EIN
You may still be required to supply your SSN for identification purposes, but using an EIN will signify to lenders that your small business is applying for the credit, not you personally.
Incorporating your small business as an LLC, S-corp, or other corporation is necessary to fundability.
Open a Business Bank Account
Open a separate, dedicated business bank account. This keeps business and personal finances separate, which is necessary for tax purposes, but there are several types of financing you cannot get without a business bank account.
You should have all the licenses and permits necessary to operate your business before you apply for financing, or at least be in the process of getting them.
Establish and Build Business Credit
If you do not yet have any business credit, or even if you have bad business credit, you can start now to establish or rebuild.
The first step, if you need to establish initial business credit, is to separate your small business from your own identity. This is what you are doing when you lay the foundation mentioned above.
If you have been in business for a while this may be a little more difficult than if you are able to do it from the beginning, but you can still do it.
Build Business Credit to Qualify for a Business Line of Credit
There are exactly four steps in the process, so you really can think of them as leaves in a lucky four-leaf clover.
Vendor Credit Tier: The First Leaf
The first leaf on that lucky clover is the vendor credit tier. This tier includes those vendors that will issue you invoices with net terms, and then report your on-time payments of those invoices to the business credit reporting agencies.
The key here is that these vendors issue invoices with net terms and report your payments regardless of what your credit looks like. Sometimes you have to make a few initial purchases first, meet a minimum time in business requirement, or both to get these terms.
Leaf Number Two: The Retail Credit Tier
Soon you will have 3 accounts from the vendor credit tier reporting on-time payments. Then you are ready to apply for credit cards from the retail credit tier. These are those cards from retail stores such as Amazon, Home Depot, and Best Buy.
Use these cards to purchase things you need for your business and make your payments on-time, consistently. Doing so will continue to grow your credit score to the point that you will be able to apply for cards in the next tier.
The Fleet Credit Tier: The Third Leaf
Once you have enough accounts reporting from the retail credit tier, usually 7 to 10, you can apply for cards in the fleet credit tier.
These cards are offered by companies such as Fuelman, Shell, and WEX that you can use to purchase gasoline as well as pay for automobile repairs and maintenance.
Lucky Number Four: The Cash Credit Tier
After you have several accounts reporting to your credit from the fleet credit tier, you are ready for the big time. You can now apply for credit cards in the cash credit tier.
These are regular credit cards like Capital One, from well-known companies such as Mastercard, Visa, and American Express.
How Does This Help You Get a Business Line of Credit?
I know what you are thinking. This is all about credit cards. What does it have to do with a business line of credit? Here’s the thing.
Using vendor credit and these cards responsibly builds your business credit to the point that you can apply for, and receive, a business line of credit.
To be clear, a traditional lender is still going to check your personal credit score when you apply for any time of financing. If your business credit score is solid however, you may have a chance even if your personal credit isn’t the best.
Some non-traditional lenders may not even check your personal credit for business financing if your business credit is strong.
Where Can I Get a Line Without a Personal Credit Check?
When it comes to non-traditional lenders, the exact requirements may vary. Almost all of them are more flexible with financing approval than traditional lenders, however. One of the easiest to access is Fundbox.
Online banking is more popular now than ever. Fundbox is an online lender that has one of the lowest minimum time in business requirements available. You can qualify for a business line of credit with them after being in business for as little as 6 months. They also have no minimum credit score requirement or monthly income requirement.
This means you can get business credit line financing with Fundbox even if you do not have great personal credit. And you can also use a business line of credit from Fundbox to help build your business credit, along with the credit tiers.
A Business Line of Credit Can Help You Turn Your Luck Around
With the knowledge of how to establish and build business credit using your four-leaf clover of the credit tiers, you can conquer most any business bad luck that comes your way. Then, you are free to offer your business services and products to your customers and clients as they deserve.
Remember, even when you find your pot o’ gold at the end of the rainbow, you must use it wisely.
If you fail to make payments consistently on time, you will find yourself with even worse luck than you had before. Don’t rush. Take your time. Don’t spend more than you can afford to pay back. And watch your business credit score grow.
Then, you can snag a business line of credit so when bad luck hits, you can leave the blarney behind and turn your luck around.
In addition to The Small Business Administration, there are a number of resources available to help you fund your business. Credit Suite is one of them. We can help establish your business credit report and find the funding you qualify for right now.