Many small business owners automatically turn to business loans
when in need of financing, but there is another option to consider as well. A business line of credit
can provide more flexibility than a traditional business loan, and works similarly to a credit card - in that you are given a credit limit and have to repay the amount that you borrow, plus interest.
Below we highlight some unique differences between a business line of credit and other funding options
such as business loans
and credit cards
Understanding a Business Line of Credit
A business line of credit, or LOC, offers a lot of flexibility in the form of a rolling credit limit that your business can dip into as needed. Once you pay back the money withdrawn, you can reuse the line of credit
up to the full amount available. For example, if you have a $50,000 line of credit and borrow $20,000 from it, you’ll still have $30,000 from which you can draw funds. If you repay your $20,000 without borrowing additional funds, your credit limit goes back to $50,000.
Repayment terms are also extremely flexible with an LOC. Similar to a credit card, you will typically have to make a minimum monthly payment toward your borrowed balance. However, you aren't locked into a fixed monthly payment like you typically would be with a business loan. With a business line of credit you can choose to pay the minimum monthly payment, or make larger payments to pay down your outstanding balance faster. Also, unlike a loan, if you don't use your line of credit, there's nothing to pay back. In other words, interest only accumulates when you draw, or take money, from your LOC.
A business line of credit can be obtained
through a bank, credit union or lending company. You will apply and request an amount of credit based on your business needs. Similar to a loan application
, the lender will likely ask you to provide documentation such as your business’s financial statements
and tax returns before making an approval decision. You may also be required to show your own financial information such as your personal credit report
. And as is sometimes the case with business loans, you may be asked to put up collateral
or provide a personal guarantee
in order to secure a line of credit for your business.
Many businesses like the flexibility of keeping a line of credit open. Small businesses can apply for lines of credit as low as $10,000 for short-term capital or inventory purchases, while large corporations can maintain LOCs of $1 million or more. The terms on lines of credit typically last longer than loans and can range from six months to five years or longer. Some lenders do charge inactivity fees or withdrawal fees on LOCs, so it's important to understand all of the fine print associated with a line of credit before you open one.
When a Line of Credit Could Work for Your Business
Because the terms are flexible, you can use a line of credit for almost any business need – whether it be covering operating expenses, expanding
your business, or anything in between. However, maintaining a line of credit for your business can require some financial discipline. A good rule of thumb is to think of your line of credit as short-term financing, and budget
the repayment of it appropriately. For seasonal businesses, some months may be slower than others. Drawing from a line of credit for payroll and other fixed expenses can help you survive the lean months, but it's important to pay off your LOC balance when business picks back up. Otherwise, you risk racking up debt and late payment fees, and tarnishing your business’s credit history
Here are some things to review
when considering a business line of credit:
• Repayment terms
• Associated fees
• Eligibility requirements
• Line of credit limits
Ultimately, the decision of whether a line of credit is the best funding option for your business will come down to your unique financial situation. It may be helpful to meet with a business lending professional to discuss your business’s borrowing needs and long-term goals. That way, they can help guide you toward the solution that best fits your business.
At BankFive, we believe the small businesses are the lifeblood of the communities we serve. If you are a small business owner considering a business line of credit, or other funding option, schedule a consultation or apply online with us today.