How to Find the Best Small Business Line of Credit [2021]

Whether it’s a start-up or an established line, you’ll be in need of funds. It may be for seasonal or sudden surge in demand or an unprecedented gap in revenue return, among numerous other reasons. If you need funds quickly and easily, then the business line of credit can be a solid option.

What is a Business Line of Credit and How Does it Work?

You must be familiar with a credit card.  This is an arrangement between a financial institution like a bank and you, where any money is not available to you but you are allowed to spend up to a certain amount. This amount is your credit limit. You can spend anytime and anywhere till you reach the credit limit. You can then repay the amount with interest and fees or keep the borrowing line open by paying a minimal amount.

A business line of credit functions like a personal credit card, with a bigger amount to spend. Like all other lines of credit, they have a set amount of money that can be borrowed as needed, paid back, and borrowed again. The interest, fees, or the size of payments along with other rules are set by the lender.

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How different is Business lines of credit compared to a business loan?

There are quite a few differences between a business Line of Credit and a business loan:

  • Maturity Terms – In general, for a business loan, you can qualify for anywhere from $1,000 to $5,000,000 with an interest rate varying from 4% to 25%. The repayment terms start from 1 year and can go up to 25 years. Whereas for a business line of credit, you can get up to $500,000 with interest rates hovering around 8%. But the repayment term typically has a maturity period of 1–2 years.
  • Rates of interest – In case of a business loan, the rate of interest is fixed over the term. A business line of credit has variable interest rates. This means that if you default on any payment or be late or exceed the credit limit, there is a chance that you will be penalized at a higher interest rate.
  • Ease of use /flexibility – Business lines of credit provide you with a pool of money that you can dip into when you need it. You only pay interest on the money you use. Compared to that, a business loan provides you with a one-time lump sum amount, and you will have to pay interest on the full amount whether you use it fully or partially. The nature of a business LOCs makes them more appealing to meet a short-term or immediate requirement or a stimulus plan like building stock before a festive season. Business loans on the other hand are more suitable for long-term investments like building infrastructure or real estate.
  • Repayments – you will have to repay a business loan consistently and constantly. Whether the payments are set weekly, bi-weekly or monthly, you can’t stop them till the full amount is paid. In a business line of credit, if you don’t use the line of credit for a couple of months then you do not need to pay anything for that period. Even when you have to pay, you have the flexibility to make a partial or full payment. For a partial payment, the balance will be carried forward to the next billing cycle.
  • Ease of loan approval – Getting approval for a business line of credit isn’t difficult. Most lenders are quite lenient with this form of funding and will approve a credit score as low as 560. Your company needs to be in business for at least 6 months and earn at least $50,000 a year. Line of credits also takes shorter approval time and it is possible in some cases to get access to the funds within a day. Business loans are stricter in their approval and most often require collateral. They also require a higher credit rating and are slow-moving with a lot more paperwork.
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Secured Vs. Unsecured Business Lines of Credit

A business line of credit can be secured through a variety of methods. Property or other fixed assets, inventory, equipment, or equity can be used as collateral. The funding agency will recover the amount by selling the collateral if the loan defaults. A secured line of credit can get you a higher loan amount with lower interest rates than an unsecured credit line. For a start-up or a new company with a low credit rating, getting a secured credit line can be easier if they can furnish collateral.

Unsecured credit is not safeguarded by collateral. In this case, the rate of interest is much higher than the secured credit lines. Businesses that are operational for quite some time and has built a sizable credit rating might benefit from them more. Often all you need along with your credit rating is a solid business plan.

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How to choose the best business line of credit for your small business

Business lines of credit have shorter repayment terms and are apt for short-term needs. You have to be aware of the variable rate of interest and fines incurred for non-payment.  A business line of credit also helps an entrepreneur with poor or no credit rating, build one for future use.

The only way you can identify the best business line of credit is by being meticulous and thorough. You need to identify how much you require, the purpose of the funding and when can you realize and repay the amount. Once you have determined that, compare the offers from lenders on these parameters –

  • Secured or unsecured credit – now you know the difference, you have to weigh the pros and cons to find out which applies best to your situation.
  • Interest rate – compare the interest rates and calculate the amount you need to pay. Go for the rate you think is competitive.
  • Loan terms – you need to be clear on the repayment terms or how the lender wants you to pay back the amount.
  • Fees and other costs – all lenders charge fees. Compare their fees and look out for any hidden costs.
  • Convenience and ease of use – shop around to find out the time taken to make the funds available to you and in what form. A few lenders even transfer the amount to your PayPal account for better convenience.
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Alternative Lenders: Faster Process for Securing The Best Line of Credit For Small Business

Alternative or on-line lenders pose a solid substitute for traditional banks and Government and other institutional lenders. They work online, making the application process simpler and smoother, and also offer faster approvals, unlike traditional lenders. They also make the funds available to you within a day or two.

If you are looking for a quick and reliable solution, alternative Lenders are the best way to get a small business line of credit. Here are a few of the most reputed among them –

Kabbage

Kabbage can be the choice for getting a business line of credit for business owners who have had problems qualifying elsewhere. They offer credit from $2000 to $250,000 over six, twelve, or eighteen-months term. They require you to be in business for at least a year, annual revenue of $50,000, and a minimum credit score of 560 to qualify. All you need to provide is the information on nature of business, your bank account information, and personal details and you will get an approval within 10 minutes.

Kabbage Reviews

Small business funding options that fit your business. Qualify in 10 minutes for up to $250,000 line of credit

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BlueVine

BlueVine prides itself on its service. You need to provide the basic information about your business online and get approval within 5 minutes. They offer credit lines up to $250000 and are a favorite of start-ups as they entertain low credit scores. The terms are typically 6 to 12 months and the interest rate can be as low as 4.8%. you also can choose a weekly or monthly repayment.

Ondeck

Ondeck offers credit from $6000 to $ 100,000 over a period of 12 months. The repayment is fixed at a weekly schedule. You can apply online or over the phone and after approval, you can get access to your funds within the same day. The best part is that Ondeck reports to the Credit Bureau so you can build your credit history as you make timely payments. There are no penalties for early repayment also.

Ondeck Review

A+ rating with BBB, 9.8/10 customer ratings at TrustPilot. Relaxed eligibility requirements and transparent Information for fast financing solutions

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What Will Affect Your Small Business Line of Credit Cost?

Few factors affect the cost of a business line of credit. They are –

Credit History

Your credit history or credit score will tell the lender about your creditworthiness as a borrower. This will determine the amount of funding you will receive. A high credit rating can fetch an unsecured or a bigger credit line. A poor credit rating will most likely qualify for a lesser amount with higher interest rates. You can get better terms and amounts with collateral though, even with a poor credit score.

You should maintain a personal credit rating of at least 500 to be able to apply and qualify. Traditional lenders like banks and SBA will require a credit score of at least 660.

Loan Amount

A large loan amount will attract larger interest rates. Combined with the lender’s fees it might result in higher APRs. Also defaulting on a high APR would imply that you have to pay a higher fine.

Business Characteristics

Lenders also see how long the business is operating. the older the business, the better is its creditworthiness. The lenders also look at the revenue generated by the business. Your business needs to be operational for at least six months, with annual revenue of $50000 to qualify for a business line of credit.

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How to Qualify for a Small Business Line of Credit?

The best way to prepare before applying for a business line of credit is to consider and build on the above-mentioned points. In addition to building a credit score, you also should look at the collateral you can offer to secure the funding.

A solid business plan explaining how you plan to spend the funding and the revenue you are looking at will also help.

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How to Apply for a Business Line of Credit

Online applications for line of credit are easier and simpler. Most of the applications whether they are online or on paper would require these basic points –

  • Basic personal information
  • Your personal credit rating
  • Business related information
    • Licenses, registration
    • Bank statements
    • Balance sheets
    • Financial statements showing profit and loss
    • Business and personal tax returns
  • Collateral
  • Current debt schedule
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Final Thoughts: The Pros and Cons of Lines of Credit

Business line of credit offers an easy and fast way to avail funding for short term requirements. But they also incur high-interest rates and APRs. Alternative online lenders offer one of the best non bank line of credit for small business. No form of funding is perfect, so you should really focus hard on your requirements and compare offers before applying.

 

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