Lendio offers business lines of credit as a flexible alternative for businesses who want a safety net in case they need funds. This type of business funding is perfect for its flexibility since you will pay interest only on the funds you actually use.
Half of all small businesses fail in their first five years, warns the U.S. Small Business Administration, and only 30 percent of them make it to 10 years. Approximately eight out of 10 of these business failures are due to cash flow problems or poor cash management, reports Entrepreneur magazine. A business line of credit can help.
However, many businesses struggle to navigate the line of credit application process or can’t get approved for a loan. Educate yourself on the ins and outs of how business lines of credit work — as well as what lenders are best for small enterprises — to protect your small business, improve your odds of loan approval, and invest in your company’s future growth and success.
What is a Business Line of Credit?
A business line of credit creates a safety buffer against the many financial challenges that could come your way. Think of it as a fall-back when an unexpected expense comes in, a customer fails to pay on time, or any of the other many cash flow situations that might arise at any moment.
Unlike a mortgage or other common forms of financing, your business line of credit can be used for any business expense whenever you need it. Until that moment, it merely sits there as an available option. And unlike short-term and long-term loans with term limits, a line of credit is a revolving loan with no set payback period, and there’s also no interest or fees until you start using your line of credit.
Thus, it makes financial sense to establish a small business line of credit ahead of time. By proactively applying for financing, you ensure you’ve got that safety net ready to go when the time comes.
And as a business owner, that time may, unfortunately, be coming sooner than you expect.
According to the U.S. Federal Reserve’s latest report on American small businesses’ financial health, 66% of them faced a financial challenge in the past 12 months. And when those challenges arose, half of the American small enterprises relied on the business owner’s personal bank accounts.
Intertwining your personal finances with your business finances creates numerous accounting problems, jeopardizes your personal financial health, and creates unnecessary stress.
A business line of credit guards against this and gives you peace of mind and more financial stability.
What Can You Use the Funds For?
When it comes to a line of credit, the world is (almost) your oyster. It’s very flexible, and you can use it for nearly anything related to your company. However, there are specific scenarios where a small business line of credit is especially useful.
Small business lines of credit are typically used when your business needs financing for something your bank or lender wouldn’t typically underwrite a loan for, especially things not linked to specific physical assets.
Cash flow issues are one of the most common reasons to tap into your line of credit, such as when:
- You’ve depleted your cash reserve (an increasingly common problem, especially for businesses that were hit hard in 2020 by the COVID-19 pandemic and saw a drop in sales).
- Clients or customers aren’t paying their invoices on time or defaulting on their payments.
- Your overhead expenses have risen unexpectedly, such as a jump in utility bills or your landlord increasing your rent.
- You’ve overstocked your inventory, creating cash management issues.
- You have incorrectly forecasted future revenue, margins, etc.
- Besides just making a safety next against costs and expenses, smart business owners also tap into a line of credit to grow their business and invest in their future.
For example, you could use it to:
- Expand your business operations, open new locations, lease a bigger office, etc.
- Buy new products, get ahead of seasonal demands with expanded inventory, or invest in new equipment that generates revenue or saves you money.
- Hire new staff, subscribe to new services, etc.
How Does It Work?
When you apply for a small business line of credit and get approved, your lender gives you access to a set amount of available financial funding.
This is a revolving loan, and you only pay interest on the amount of funds you’ve used. Every month, your bank will send you a statement showing the total amount of your line of credit, how much you’ve used, and any related interest and fees.
Think of it as working somewhat akin to your personal credit card. Once you’ve paid back any credit you’ve used, that amount will become available for you to use again.
How to Apply For a Line of Credit with Lendio
The U.S. Federal Reserve notes that many small businesses get denied when applying for lines of credit. And if a company manages to get approved, the reserve notes that only 51 percent of applicants get the full amount of financing they need.
Lendio’s small business online marketplace was created to overcome those financial hurdles and help small business owners quickly get the financing they needed.
Lendio connects companies to small business-friendly lenders. The streamlined application process is designed so that getting the capital you need for your business’ success is as easy as possible:
- Apply for a Lendio business line of credit (the total application takes approximately 15 minutes to complete)
- Provide business details and documentation to support your application (in most cases, Lendio’s lenders will want to see that your business has been operating for longer than six months and is generating sufficient revenue)
- Receive your quotes from the dozens of lenders in Lendio’s online marketplace
- Compare your quotes to choose a Lendio business line of credit that works for your needs
- Get funded: In most cases, you can start using your Lendio business line of credit within 24 hours of approval
If a business line of credit is not the right solution for you, Lendio can help with finding the funding option that works best for your business, since they also work with other loan types such as:
- SBA Loans
- Short-term loans
- Merchant Cash Advances
- Term Loans
- Equipment Financing
- Commercial Mortgages
- Accounts Receivable Financing
- Start-up Business Loans
- Business Acquisition Loans
Business Owners Also Asked
Should You Get a Business Line of Credit?
In most cases, yes. Establishing a line of credit for future use makes financial sense (and cents). There are numerous benefits to getting a small business line of credit, like flexible access (use it for any qualifying business expenses), low fees (pay interest only on the credit you use), cost savings (save you money on transaction fees, interest rates, and penalties compared to other loan types)
Talk to your accountant or financial advisor when considering a line of credit, as there may be potential drawbacks depending on the specific lender you choose, like taking on excess debt, paying too many fees, like monthly or annual maintenance fees and payback terms.
Is it Hard to Get a Business Line of Credit?
As noted above, the U.S. Federal Reserve warns that many small businesses struggle to get a business line of credit. This tends to be most problematic when going through a traditional bank or lender, which may impose requirements like a high level of annual revenue, a high credit score, or an extended period of doing business. Lendio was launched to overcome these challenges and make lending more accessible to small businesses.
What is a Good Rate for a Business Line of Credit?
Interest rates will vary depending on your loan amount, credit score, etc. A reasonable interest rate for your business line of credit should range between 10% to 20%, though some lenders may edge a bit higher or come in a bit lower.
Can You Use a Business Line of Credit For Personal Expenses?
If you open a business line of credit, you cannot use it for personal expenses. One problem you may face with doing so includes breaking your financial agreement with your lender, which could trigger repercussions like being made to pay back your full line of credit immediately. Another issue could be incurring in government-imposed tax penalties, as the Internal Revenue Service does not like it when business and personal finances are intertwined.
Get Started Today With a Lendio Business Line of Credit
Whether you want to hedge against potential financial challenges or invest in your business’ growth, a Lendio business line of credit offers the flexibility you want. Get started with Lendio today and apply for a Lendio business line of credit today.