If you’re a small business owner, you know that revenues aren’t always consistent. That’s where business funding comes in, and there are many options to choose from. One of the more flexible debt products available is a business credit line, as you can use it on an as-needed basis. So, even if your company is flourishing at the moment and there isn’t a need for a cash infusion, the funds will be there waiting if a time comes that you need them to expand or avoid financial issues and interruptions in operations.
What Are Business Credit Lines?
A business line of credit is a debt product you can use to get working capital when you need it or to smooth out cash flow issues. Instead of receiving a lump sum following approval, you’ll have access to a pool of funds you can draw from as needed.
It operates like a credit card – you can pull funds, repay them and pull them again as long as the credit line is open. Some lenders offer business credit lines for a short period, while others give you more time. You’ll only pay interest on the amount you borrow, and the lender may assess a draw fee each time you withdraw funds.
What Are the Types of Business Credit Lines?
Secured Business Credit Line
Secured business credit lines require collateral for approval. This means the lender has rights to the asset you use to secure the credit line, whether it’s inventory, property, equipment or something else of value, should you default on the payments.
Unsecured Business Credit Line
As the name suggests, unsecured business credit lines do not come with collateral requirements and are often a safer option for businesses. But you won’t be completely off the hook if you fail to repay the lender, as they often require a personal guarantee that states your personal assets are at stake in the event of default. There are also lenders that may place a lien against your business assets to recoup what’s owed.
Business Credit Cards
Contrary to popular belief, business credit cards are a type of business credit line. But you’ll likely get a higher interest rate than you would with an unsecured or secured business credit line. Furthermore, your spending limit may be lower, and business credit cards often come with steep cash advance fees if you need to access funds to make a purchase. There are advantages, though, including incentives you may receive by opening a business credit card with an interest-free promotional period or one that offers cash-back rewards or let you accrue travel points that can be redeemed for items, gift cards, cash or statement credits.
Comparing Business Credit Lines
When evaluating your options, consider these factors to determine which option is right for your business.
Do you meet the lender’s eligibility requirements? Most have a credit score, time in business and annual revenue requirements, and you’ll often find that online lenders and credit unions are more lenient than traditional banks.
Maximum Credit Limit
Is the lender offering a line of credit that suits your company’s needs? Or are there more generous offers that are a better fit elsewhere?
Are the interest rates on business credit lines fixed or variable? The latter is common and also means that your borrowing costs and monthly payment could vary over time. But if you want a predictable rate and monthly payment, opt for a fixed-rate product instead.
Fees aren’t uncommon with business credit lines. So, when comparing your options, be sure to evaluate the following:
- Maintenance fees: In some instances, banks and credit unions will assess a fee annually or each month to keep your account open.
- Draw fees: Each time you initiate a withdrawal or transfer request from your line of credit to your business checking account, the lender may charge what’s referred to as a draw fee.
- Inactivity fees: You may also incur fees if your credit line is dormant for an extended period.
- Origination fees: These fees are assessed when you apply for a business line of credit and are typically payable over time. (Note: Some lenders do not charge origination fees, but they aren’t necessarily the best choice. In fact, it’s not uncommon for these lenders to roll the cost of processing your lending application into the interest rate they offer you).
The lenders that charge the least amount in fees, coupled with the most competitive interest rates, should be at the top of your shortlist of options.
Fund Availability and Access
How long does it typically take for the lender to process applications and fund business credit lines? If you’re crunched for time and need fast access to cash, only consider lenders with quick turnaround times.
Impact on Personal Credit
Will you need to provide a personal guarantee to get approved? Does the lender report account activity on your personal credit profile? You want to keep business and personal affairs separate. So, a business credit line that doesn’t impact your personal credit is ideal.
Loss of Business Assets/Equity
Does the lender require you to put up collateral for the business credit line? If so, your company’s assets could be at risk in the event your company falls behind on the monthly payments and is unable to repay what’s owed.
Should You Get a Business Credit Line?
A business line of credit is an ideal way to establish or improve your company’s credit profile and access more competitive funding opportunities. But if you’re new to business credit or just getting started in your business, only apply for a small amount.