Business line of credit

Business Line of Credit: Best Options for 2021

All businesses, no matter how successful, sometimes need help maintaining their cash flow. There are many scenarios where a line of credit could prove to be extremely useful.

At a glance — Overheads such as salaries and running costs, are a reality of every business. What’s more, equipment maintenance or replacement cost can suddenly arise without warning. If your business is going through a slow period, or you are waiting on several high-value payments, your cash flow could be greatly impacted. This could potentially jeopardize your business

Many businesses form agreements with a lender for a certain amount of cash to be set aside until it is needed. This works much like an overdraft - once you repay a certain sum out of the line of credit, that cash becomes available again. 

A business line of credit is a type of loan for a new business that can give you the extra boost your business needs, while you are growing your invoicing levels.

Find Your Best Business Line of Credit & Provider? 

There are some excellent options on the market. To save you time and to provide you with some clarity, we’ve researched five of the best lenders and summarized them for you in the table below.

Company

Max/Min Loan

Loan Rates

Special Requirements

Get a Loan

Fundbox

Full Fundbox review

$100,000 / $100,000

4.66% - 8.99%

Depends on individual lender

Apply Now

OnDeck

Full OnDeck Review

$6,000 / $100,000

From 35.9% APR

Minimum requirements: 1 year in business; Personal FICO score 600; Business annual revenue $100K; Business bank account

Apply Now

BlueVine

Full BlueVine review

$5,000 / $250,000

From 4.8%

Minimum requirements: Fico score 650+; 2+ years in business; Monthly revenue $30K+

Apply Now

Kabbage

Full Kabbage review

$5,000 / $250,000

24% - 99% APR

Basic requirements: Linked business information; Bank account info; Personal information

Apply Now

StreetShares

Full StreetShares review

$5,000 / $1000,000

Max. 39% APR

Standard requirements: 1+ year in business; Personal credit score 620+; Business revenue $100,000 per year

Apply Now

What is a Business Line of Credit?

A business line of credit is different from a traditional term loan. A traditional term loan is generally fixed, and once you have made all the repayments, the contract ends. By contrast a line of credit usually has a more relaxed payment schedule. Once you have paid off all or part of the credit balance, you can use the money again. This is sometimes called revolving credit.

Secured vs. Unsecured Line of Credit

One element that a line of credit has in common with a term loan is the possibility of it being secured or unsecured. Here are some of the key differences between a secured and unsecured business line of credit.

  • Secured business line of credit: If a lender is comfortable with the risk profile of the borrower, they may approve an unsecured business line of credit, meaning that they don’t demand collateral. This is usually the case with well-established companies that have a good revenue record and are requesting a smaller amount (generally less than $100,000).
  • Unsecured business line of credit: when a lender feels there’s a higher level of risk, they may insist upon a secured line of credit. In this situation, they will demand some form of collateral – an asset belonging to the company that the lender can claim if the borrower defaults on the loan.

Ondeck

What are the Requirements for a Business Line of Credit?

Major lenders are generally more demanding when it comes to what they require from borrowers applying for a Line of Credit.

The following business line of credit requirements are standard with all major lenders. However, specific requirements will vary according to the nature of your application.

  • Time in business: The longer that your business has been running, the greater the number of available options. Young companies represent a greater risk to lenders, so the terms offered are generally less favorable.
  • Revenue and Profit: Revenue alone isn’t a reliable indicator of a company’s health. Lenders will also want to know what liabilities the firm has and how much money is left after all its commitments have been met.
  • Personal and Business credit score: As well as knowing if the company is in good shape, lenders also want some insight into the creditworthiness of the owner.
  • Income tax returns: According to the U.S. Bureau of Labor Statistics, approximately 20% of businesses close before they’re a year old. This is probably one reason why lenders want to see solid evidence of your company's health when considering your application for a Line of Credit.

    Business Line of Credit Pros and Cons

    There are numerous financing options available to businesses, so it's essential to understand which one is best for the needs of your company.

    To ensure that a line of credit is beneficial to your company and not just another liability, you first need to consider if it suits your business plan and the company’s current circumstances.

    Consider the following advantages and disadvantages before deciding if a business line of credit is the best option for you.

    Business Line of Credit Pros

    • Can help to maintain cash flow during quiet revenue periods or when awaiting invoice payments
    • Helps to establish your company’s credit record if used well, making  future credit facilities attainable and favorable
    • Increases flexibility in managing your business, allowing you to invest in it without affecting cash flow
    • Revolving credit. Like an overdraft, as soon as you pay off part or all the borrowed amount, you can use it again

    Business Line of Credit Cons

    • A  line of credit can be difficult for new businesses to obtain. Lenders often require a company to have been running for two or more years
    • Maximum borrowing amounts are relatively low compared to other forms of credit
    • It is tempting to use the line of credit when it’s not needed
    • Charges can mount up. Set up fees may be relatively low, but charges can end up being high
    • Business Line of Credit rates can be high

    Final Thoughts

    Although the sum of money given in Business Lines of Credit are relatively low, it can be difficult for a new, small business to qualify. 

    However, it’s a very convenient way to provide your company with a financial cushion. A business line of credit also offers flexibility.