Business lines of credit can help provide the capital needed to manage cash flow, fund day-to-day operations, and take advantage of new opportunities. We’ve evaluated the best business lines of credit based on loan terms, fees, rates, customer satisfaction, and overall quality.
Fundera does not lend money directly but offers a digital marketplace where you can connect with lenders to provide a financing solution for your business.
A business line of credit is an account with a lending institution that provides you access to a predetermined amount of money. It allows you to borrow funds as needed and pay it back at your convenience. You can draw down the entire line of credit or only what you need.
Business lines of credit are often called “revolvers” because they revolve rather than being paid off in full at the end of each billing cycle. This allows businesses to take advantage of flexible payments, which helps them better manage their cash flow. Businesses can use this type of financing to meet unexpected expenses or make large purchases that would otherwise be difficult to fund with their regular cash flow.
What are the requirements for a business line of credit?
The requirements for getting a business line of credit vary by lender, but there are some commonalities:
Credit score: A strong credit score is one of the essential factors in determining whether you’ll be approved for a line of credit from any bank or lender. Your score will indicate how likely you’ll repay your debt obligations on time.
Annual revenue: Annual revenue is another factor that lenders often look at when deciding whether to approve your application for a line of credit. The higher your yearly revenue, the more likely you’ll be approved for financing from banks and other financial institutions.
Collateral: In some cases, to secure your line of credit, you must have collateral to pledge as security. This could be inventory, equipment, real estate, or other assets that can be sold quickly if you default on your payments.
Time in business: Lenders prefer borrowers who have been around for at least one year and have proven their ability to manage their finances responsibly.
What are the types of business lines of credit?
Here are some of the most common types of lines of credit:
Secured line of credit: A secured line of credit is backed by collateral and is usually used by small businesses that don’t have enough assets to get a large loan. The lender will require collateral from the borrower to protect itself from potential losses if the borrower defaults on the loan.
Unsecured line of credit: An unsecured line of credit does not require any collateral because no asset is given up in exchange for the funds being advanced. Instead, lenders look at other factors when deciding whether or not to grant this type of loan, including your credit score, current income level, and business history, if applicable.
Real estate line of credit: A real estate line of credit will allow you to borrow money based on the value of your property.
Benefits of a business line of credit
Here are some benefits of a business line of credit:
Quick access to cash: If you need money quickly for unexpected expenses or emergencies, a line of credit can help you get cash fast without waiting for your bank’s approval.
Builds business credit: A business line of credit helps demonstrate that your company is financially stable and reliable by showing that it has been able to repay its loans on time in the past. This can be especially helpful if you’re looking to secure merchant services, insurance, or other products that require proof of financial stability before they’ll work with you.
Improves business adaptability: Business lines of credit are flexible and versatile tools that allow businesses to adapt quickly to changing market conditions. They are also an effective way for companies to grow their operations whenever they need money for expansion or other purposes. These loans can be used for any purpose that improves operations or increases profitability—even if it’s just buying inventory or equipment needed for growth.
How can you use your business line of credit?
Business lines of credit are a good funding source because they are flexible, convenient, and easy to obtain. Here are some examples of how a business line of credit can help your company:
Purchasing inventory
Expanding operations
Make improvements to your property, like renovating an office
To pay seasonal workers or contractors
To cover unanticipated expenses such as legal fees or medical bills
How to choose the best business lines of credit
When looking for a business line of credit, there are a few key factors to consider.
Decide what you need: Banks and other financial institutions offer business lines of credit to allow businesses to borrow money. Some lines of credit are better suited for working capital, while others are intended for financing equipment or real estate. If you’re unsure which type is right for your business, talk with a banker or financial advisor who can help you decide.
Look at the interest rate: The interest rate you pay is one of the most important factors when choosing a line of credit. The interest rate is typically expressed as an annual percentage or APR, and it’s usually based on the amount borrowed and your creditworthiness.
Consider fees and penalties: Some lenders may charge an origination fee for opening an account, so consider this when comparing offers from different banks or lenders. You may also want to look out for any maintenance fees associated with your line of credit or whether there are late payment fees if you miss a payment. These conditions could significantly increase your costs if they aren’t accounted for in your budgeting process.
Meet the qualifications: Before applying for a business line of credit, ensure you meet all the qualification requirements set by the lender. Some lenders will require you to have been in business for at least one year before they approve an application. Others may not have any additional qualification requirements beyond what is required by law. You want to be aware of your time.
