Published By Janet Gershen-Siegel at August 23, 2018
Written by Janet Gershen-Siegel
Do you know how to get a small business line of credit? We break down what a line of credit really is, and how to get one.
A credit line, or line of credit (LOC), is an arrangement between a borrower and a bank or private investor that sets a maximum loan balance that a borrower can access.
A borrower can get access to funds from their line of credit any time, just as long as they don’t go beyond the maximum set in the arrangement, and as long as they meet any other requirements of the financial institution or investor such as making timely payments.
Credit lines provide many unique advantages to borrowers such as versatility. Borrowers can employ their line of credit and merely pay interest on what they use, in contrast to loans where they pay interest on the total amount borrowed. Credit lines can be reused, so as you acquire a balance and pay that balance off, you can use that available credit again, and again.
Credit lines are revolving accounts similar to credit cards, and are comparable to various other sorts of funding such as installment loans. Often, lines of credit are not secured, much the same as credit cards are. There are some credit lines that are secured, and therefore easier to be granted.
Credit lines are the most routinely sought after loan type in the business world even though they are preferred, true credit lines are uncommon, and difficult to find. Many are also very hard to qualify for requiring good credit, good time in business, and good financials.
But there are various other credit cards and lines which few people know about that are readily available for startups, bad credit, and even if you have no financials.
Most credit line varieties which most entrepreneurs imagine come from traditional banks and traditional banks use SBA loans as their foremost loan product for small business owners. This is because SBA covers as much as 90% of the loan in the event of a default. These credit lines are the hardest to qualify for because you must qualify with SBA and the bank.
There are two fundamental varieties of SBA loans you can generally obtain. One form is called CAPLines. There are in fact 5 types of CAPLines that can work for your small business.
You can also get a lower loan amount faster using the SBA Express program. Most of these programs offer BOTH loans and revolving lines of credit.
From SBA … “CAPLines is the umbrella program under which SBA helps business owners meet short-term and cyclical working capital needs”.
Loan amounts are available up to and including $5 million. Loan qualification criteria are the same as with other SBA programs.
This small business Line of credit advances against anticipated inventory and accounts receivables. It was made to aid seasonal businesses. Loan or revolving are available.
Finances the direct labor and material cost associated with executing assignable contracts. Loan or revolving are available.
Made for general contractors or builders constructing or renovating business or residential buildings. It is used to pay for direct labor-and material costs, where the building project works as the collateral. Loan or revolving are on offer.
For companies unable to meet credit standards connected with long-term credit. Funding for cyclical growth, repeating and/or short-term needs. Repayment stems from transforming short-term assets into funds.
Businesses constantly draw from the LOC, based upon preexisting assets, and pay back as their cash cycle dictates. This line often is made use of by businesses that furnish credit to other companies.
This is an asset-based revolving line of credit of right up to $200,000. This line operates like a standard asset-based line save that some of the more stringent servicing requirements are waived, if the business can consistently show repayment ability from available resources for the sum total.
You can get approval for as much as $350,000. Interest rates differ, with SBA enabling banks to charge as high as 6.5% over their base rate. Loans above $25,000 will require collateral.
To get approval you’ll need good personal and business credit. Plus the SBA says you should not have any “blemishes” on your report.
You’ll need a good bank score. An acceptable bank score demands you have at least $10,000 in your account over the very last 90 days.
You’ll also need a resume showing you have business sector experience and a well put together business plan. Add 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 only if you have them. As for the collateral to make up for the risk, often all company assets will be accepted as collateral. This can also be some personal assets including your residence.
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 a lot easier to get approval for than conventional SBA loans. They also necessitate much less documentation for approval. These alternative SBA credit lines often require good personal credit for approval.
Unlike with SBA, many of them don’t require good bank or business credit approval. Many of these types of programs require two years’ of tax returns. Tax returns MUST demonstrate a profit. Rates can vary from 7% or greater and loan amounts range from $25,000 into the millions. Loan amounts are commonly based upon the revenues and/or profits reflected on the tax returns. Sometimes lenders may ask for other financials such as a profit and loss statement, balance sheets, and income statements.
Merchant cash advances have rapidly become the most popular way to get financing, in large part due to the easy qualification process. Businesses with $10,000 in earnings 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 need to have at least $10,000 in revenue for approval. You should be in business for at minimum one year, though three years is preferred. Lenders regularly want to see a credit score of 650 or higher for approval.
Loan amounts are often about $20,000. Lenders commonly will pull your business credit, so you ought to 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 typically aren’t a lot of funding sources who offer it.
You can get financing regardless of personal credit if you have some sort of stocks or bonds. You can also get approval if you have someone 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 typically under 2%, making this one of the lowest rate credit lines you’ll ever see. You can still 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 rather helpful for startups especially. Credit lines allow you to take out more cash at a much cheaper rate than do cards. These are the main two differences that will have an effect on 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 qualify for as card approvals are usually very quick, many times automated, while at the same time line require an in-depth underwriting review. Lines usually offer lower rates, per Bankrate card rates average 13% while lines average 4%.
Most of these do report to the consumer credit reporting agencies. They all call for a personal guarantee from you. You can get approval generally for one card max as they stop approving you when you have two or more inquiries on your report.
Most credit card companies furnish business credit cards including Capital One, Chase, and American Express. These have rates much like consumer rates and limits are also similar. Some report to the consumer reporting agencies, some report to the business bureaus. Approval requirements are similar to consumer credit card accounts.
Commonly, when you apply for a credit card you put an inquiry on your consumer report. When other lenders see these, they won’t approve you for more credit since they aren’t sure how much other new credit you have recently obtained.
So they’ll only approve you if you have no more than two inquiries on your report within the most recent six months. Anymore will get you refused.
With unsecured business financing, you partner with a lender who focuses on securing business credit cards. This is a very rare; very few know of program that few lending sources offer.
They can usually get you three to five times the approvals that you can get on your own. This is due to the fact that they are familiar with 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 typically range from $2,000 – 50,000.
The end result of their services is that you generally get up to five cards that resemble the credit limits of your highest limit accounts now.
Multiple cards generate competition, and this means you can get your limits raised typically within 6 months or fewer of your original approval.
Approvals can go up to $150,000 per entity for instance, a corporation. With UBF they actually get you three to five business credit cards which report solely to the business credit reporting agencies. This is huge, something most lenders don’t offer or promote.
Not only will you get money, 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 low introductory rates, ordinarily 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 very best cards for points, which means you get the very best rewards.
Much like with just about anything, there are HUGE benefits in teaming up with a source that focuses on this area. This is because the results will be better than if you try to go at it on your own.
You have to have excellent personal credit right now, ideally 685 or better scores, the same as with all business credit cards. You shouldn’t have any derogatory credit reported to get approval, you must also have open revolving credit on your consumer reports right now.
And you’ll have to have five inquiries or less in the last six months reported.
All lenders within this space charge a 9-15% success based fee and you only pay the fee off of what you secure. Bear in mind, you get a number of additional benefits and about three to five times more money with this program than you can get on your own, which is why there’s a fee, the same as all other lending programs.
You can get approval with a guarantor and you can even use a wide range of guarantors to get even more money. There are additionally other cards you can get with this very same program but these cards only report to the consumer reporting agencies, not the business reporting agencies. They are consumer credit cards versus business credit cards.
They provide similar benefits such as 0% intro APRs and five times the amount of approval of a solitary card but they are much easier to qualify for.
You can get approval with a 650 score and seven inquiries (or fewer) in the last six months. And you can have a bankruptcy on your credit, and other negative items. These are much easier to get approval for than UBF business cards.
With all previous cards, you have to have good consumer credit in order to get approval but what happens if your personal credit isn’t really good, and you do not have a guarantor?
This is the time when building corporate credit makes a great deal of sense even if you have good personal credit, building your company credit helps you get even more money, and in the absence of a personal guarantee.
Corporate credit is credit in a business name, that’s linked to the company’s EIN number, and not the owner’s Social Security Number. When carried out properly, business credit can be secured without a personal credit check and no personal guarantee. So this is something all other cards above can’t deliver.
You can get three types of corporate credit cards. Vendor credit offers net 20 terms to start a business credit profile. Move onto store credit, and then get credit cards with high limits at most establishments. Move onto cash and fleet credit with Visa, MasterCard, American Express cards you can use anywhere.
You can get these without any credit check or guarantee. Limits are oftentimes $5,000 – $10,000 to begin, and can exceed $50,000. Learn more here and get started toward how to get a small business line of credit. Be a credit winner!