Why a Business Line of Credit May Be a Smart Choice for Your Business

 
01/25/2020



By Marco Carbajo,


As a business owner, you probably already know access to working capital is the lifeblood of a business.  Alexander Graham Bell said, “before anything else, preparation is the key to success.”

So, it’s essential to be proactive and ready to deal with any unforeseen expenses in order to keep the business afloat. One way you can accomplish this is to get a line of credit for your business.

When it comes to business credit, there are various options to consider. A business line of credit is a preferred choice among small business owners for obvious reasons. 

To qualify for a line of credit, traditional banks typically require good personal credit and a two-year track record of business history with healthy revenue.

Alternative lenders offer a faster and easier application and approval process but the interest rates are slightly higher. With alternative lenders, a business with healthy revenues can still qualify even if the applicant’s credit score is in the 500+ range.

You can apply for a business line of credit at your local bank or with an alternative lender. A line of credit can be either secured or unsecured. You can secure a line of credit with your assets or other form of security such as a certificate of deposit.

A business line of credit is more economical compared to other types of financing such as a term loan or merchant cash advance. Once the line of credit is established, you can draw funds from it by making a direct deposit into your business checking account, or by using a convenience check linked to the credit line account.

Similar to a line of credit, a business credit card is another option that may be a smart choice especially for startups or businesses with a minimal track record. Business credit cards are a different type of financial instrument than a line of credit, but there are advantages to using them.

For example, with a line of credit you have the ability to write checks to pay billers that don’t accept credit cards. In addition, there are no cash advance fees associated with lines of credit compared to business credit cards.

However, business credit cards offer a much easier application process and qualification requirements compared to a line of credit. You can also receive rewards for your business in the form of points, miles, and cash back.

Before you make a decision it’s important to check your business’s qualifications first. You’ll save time and effort by knowing where your business stands prior to applying.

To start, order a copy of your personal credit reports and scores. Once you know where your scores are, you’ll be able to rule out lenders that have minimum score requirements that you do not qualify for.

How long have you been in business? Generally, the longer you are in business the less risk in the eyes of a lender. Traditional banks typically require a minimum of two years in business. Whereas, alternative lenders have a much shorter time requirement ranging from six months to one year in business.

Additionally, review your company’s annual revenues. Some lenders have a minimum requirement for annual revenues that must be met in order to qualify for a line of credit. If you don’t meet the revenue requirement for a specific lender, then don’t apply.

Finally, assess what kind of collateral you can offer since you may be required to secure the line of credit. Keep in mind, not all lenders require physical collateral. They may just require that you sign a personal guarantee.

Once you have evaluated your company’s qualification and where you stand, you’re ready to explore your options. By assessing your situation, you’ll be able to narrow down your options and find the ideal business line of credit to apply for. No matter which option you consider, one of the most important tools for your business is access to business credit.

SOURCE: https://www.sba.gov/blog/why-business-line-credit-may-be-smart-choice-your-business



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