A primary benefit of a business line of credit is that it allows businesses to borrow money when needed while avoiding paying interest on a large sum loan. For most cases, lines of credit aren't intended to fund one-time purchases, such as equipment — which is what equipment financing plans are ideal for.
Yet, business lines of credit are intended for those ongoing expenses of a business that lenders do not typically underwrite a sole loan for, such as staffing/labor, inventory, etc. These types of small business loans can be short-term or long-term.
Getting a business line of credit loan can help smooth out unprecedented costs of much more complex projects, which can be challenging to allocate exact funds in advance. Lines of credit are also ideal if clear funds aren't precisely budgeted because interest rates will only pertain to the amount withdrawn and never to the amount of your pre-approved credit limit. In most cases, interest rates for business lines of credit are much lower than those of a business credit card and with higher amount limits. Interest rates are only applied to the amount withdrawn and never to the limit defined. These benefits and more make lines of credit a much more viable option for small business owners and their needs.
Business Line of Credit Benefits
The benefits gained from a business line of credit can be endless, from boosting your credit score to gaining cash flow stability. Here are just a few of the many benefits a line of credit can aid your business:
Your conditions, your terms — A line of credit allows you to tailor your terms and conditions, from loan amount to repayment schedule. You decide when to withdraw and how much.
Simple and fast — Online lenders like Steer Financial make the process of opening a line of credit or small business loan fast and straightforward. Funds from a line of credit can be accessed in as little as a few hours to a maximum of just days, with the working capital to take control of your business cash flow.
Boost your business credit — Most of the top credit reporting bureaus analyze credit scores based on credit availability. Having an open revolving line of credit can help boost your business and personal credit score as long as the amount limit isn't exceeded.
Competitive interest rates — Business lines of credit offer competitive APRs that start as low as 5%, dependent on the amount limit and other factors. Options for unsecured and secured business lines of credit are available, while unsecured lines have no collateral requirements.
What Is Needed for a Business Line of Credit?
Wondering how to apply for a business line of credit? There are a few critical qualifying requirements for a business line of credit. The minimum business line of credit requirements is for a business to be operational for at least six months, have a consistently strong annual revenue stream, and have a good/average credit score. Now that you have a better snapshot of the requirements needed, these steps can be used as a general guide to secure a business line of credit.
1. Check Your Eligibility
As mentioned above, eligibility for a business line of credit requires three vital factors:
Time in business: Most lenders require a business to be operational for at least six months, while others require one to two years. The longer a company operates, the more stable a business looks to a lender.
Credit history: A good credit history signals the likelihood of a business defaulting on payments. Most lenders look for a score averaging around 650, yet we work with many lenders that accept scores as low as 550 to 600. There are various other factors that a business can use to compensate for a low credit score.
Business revenue: A substantial revenue stream shows a business' consistency. A minimum or monthly revenue varies from lender and depends on other factors. Revenue requirements range from $8,500/monthly to $250,000/annually. However, time in business and credit score can compensate for inconsistent revenue streams.
2. Determine the Funding Amount You Need
Once you've checked your business eligibility, you'll have to determine the funding amount your business needs. Line of credit limits depend on the lender and your business's vital factors, but limits typically start at a range of $2,000 and go up from there.
Since interest is only paid upon the withdrawn money, asking for a higher limit than you'll need is acceptable. Yet, businesses should always note that spending limits should always be accounted for, which is why asking for a credit increase is also a great pivot when more funds are needed after the initial credit line. Depending on the business's history and credit, the lender can approve the credit increase or ask for additional collateral for approval.
3. Gather Required Documents
Once you've had some time to think about the funding amount your business needs, your loan advisor should guide you through the necessary documents needed for the application process. Documents that are usually required to kick start the line of credit application are the following:
Business and personal bank statements
Business and personal tax returns
Additional documents might be needed depending on the lender, including:
Articles of Incorporation
Building Lease
Business Licenses
Business Plan
Financial Statements
Profit & Loss Statements
4. Submit Application
After securing all the necessary documents, it is time to submit your application online, by phone, or in person. Loan offers vary by application yet can take as little as a few minutes or as long as several days to get a decision. Additional information might also be needed to review your application and a quick informal interview with the lender. Most common additional information asked by the lender include:
Annual business revenue
Business tax ID/EIN
Desired funding amount
Full name(s) of all business owners
Legal business name
Loan purpose
5. Review Loan Agreements
The final step is to review any line of credit offers. If your line of credit application is approved, a loan agreement will be sent to you by your preferred lender. Your advisor should guide you through the offer and work with you to make any changes in funding amount, payment schedules, withdrawal stipulations, etc.
Once all parties have finalized and signed the loan agreement, a quick bank preauthorization will be processed. Funds can then be expected as fast as the same day and up to 24 hours depending on your lender.
Make sure that every detail will be covered and not left unturned. At Steer Financial, we strive to make that our core promise, leading financing streams in your terms – always!