- Loan Insider
Business Line of Credit: How To Apply for One
Having accessibility to cash and cash flow is vital for businesses of any size, especially in today's pandemic era. Having access to a business line of credit is a great way to get cash when your business needs it. A line of credit can also come in handy when your business unexpectedly has a cash flow gap or when an opportunity arises. Having the right funding opportunities can help your business weather any financial constraint or help you expand your business.
What is a Business Line of Credit?
A small business line of credit provides a reliable source of cash that can be used at any point and time for any business needs to meet short-term business goals or needs. There are usually no actual conditions on what the money should be used for or how. These types of loans can be used for payroll and other small business expenses in order to have the loan forgiven.
A business line of credit loan may come with withdrawal fees when you schedule a withdraw for a specific amount. It is crucial to understand the lender's criteria and learn all the loan details when signing. Transparency about additional fees and other charges on loans usually comes from honesty and trustworthy lenders. Having a suitable lender will help you understand and learn about these details.
How to Apply for A Business Line of Credit
Starting a business line of credit at your local bank or credit union might be the easiest way, but keep in mind that some requirements and lending standards are actively updated. The Federal Reserve has stimulated banks and credit unions to provide business lending, which has helped small businesses weather the turmoil Covid-19 has created. To get an idea if your business might qualify for a small business line of credit loan, consider the following criteria:
1. Credit Score:
Most lenders look at your personal and or business credit to consider your business's rate of risk. The higher your credit score is, the more possibilities or options you may find. Don't get discouraged if you happen to have a lower score. There is a ton of business lenders in the market that may be able to qualify you and your business.
2. Time in Business:
Lenders usually like to see businesses that are well established in order to approve them for a business line of credit loan. Alternative lenders tend to be a better option if you only have had your business for less than two years.
One of the main components of determining if your business qualifies for a business line of credit is your monthly or annual revenue. Lenders tend to base their decision on how healthy your business looks. They either review Tax Returns or financials to determine how your business grows month over month and how you run your business.
Different Business Lines of Credit
There are vast types of business lines of credits, and every lender might offer their own version. Keep in mind that most business lines of credit either have short- or long-term repayment options. That is important to know when applying for your business, based on the use of capital and the timeframe you are expecting to pay back the loan.
1. Short Term Lines of Credit:
If you and your business need immediate cash availability and looking to repay the terms fast, try to find a trustworthy alternative lender. Alternative lenders have a faster, streamlined application process that helps access funds quicker just like Steer Financial. In addition to a quicker method, the requirements are far less than going through your traditional bank or credit union. The steps to apply for a loan with an alternative online lender are as simple as completing their online application, uploading your business bank statements, and making a decision.
2. Long term Business Line of Credit:
If you need longer repayment terms, it would probably be best to apply for a business line of credit through your traditional bank or credit union. These loans tend to have more competitive pricing and offer more extended repayment options, but the criteria needed to qualify are a bit more strenuous. A traditional bank might ask for a credit score of at least 680, two years of business, and personal financials, which tends to paint your business's financial health and stability. Applying for a long-term business line of credit through a traditional bank can take months to get approved, so be wary of lengthy wait times.
The overall difference between having a short versus a long-term business line of credit is processing time and approval rates aside from the different repayment options each might have. Short-term business lines of credits from online alternative lenders usually use automated and manual underwriting, streamlining the application process.
In contrast, traditional banks or credit unions tend to manually underwrite every application, resulting in longer wait times. Short-term alternative online lenders usually require a business to be operating for a minimum of six months, have a credit score of at least 500, and annual revenue of at least $50,000+. Traditional lenders require at least two years in business, a 680+ credit score, and annual revenue of $250,000+.
Cost of Having Business Line of Credit
Not all credit business lines have an Annual Percentage Rate (APR), as we tend to think. An APR is usually amortized and has an annualized percentage added to the original loan amount plus additional servicing fees. Having an APR on a loan or business line of credit can end up costing you more in the long run versus having a Simple Interest Rate.
If you plan to get a line of credit on a short-term repayment option, having a simple interest might save you more money than a line of credit with an APR rate. A simple interest rate is a total interest you will repay the lender plus the loan amount you are borrowing. This type of interest rate is straightforward and not as complicated as an APR rate.
Other standard fees on a business line of credit might be draw fees which are charges between one to three percent of the total draw amount. Draw fees are usually charged every time you take any additional capital from the line of credit.
Processing fees might be another common charge you might see on the agreement. This fee is usually charged depending on how fast you need the cash available in your bank. A wire transfer can cost anywhere between $15 to $50, but funds can be available instantly in your bank. ACH method can take anywhere between two or more business days to fund and usually is free.
Termination fees or repayment fees will vary from lender to lender. Termination fees can at times be charged if you decide to pay off or end the business line of credit before the maturity or term of the loan. You can also get charged prepayment fees if you draw or repay early. Usually, online alternative lenders provide outstanding early repayment or termination fee discounts if you are enticed to pay off the line of credit sooner rather than expected.
Ready to Apply for a Business Line of Credit?
A business line of credit can be one of the easiest types of financing available for businesses. Various factors are essential to know before applying or obtaining a loan. These factors include your business's financial health, the time frame of when cash is needed, and determining between a short-term or long-term loan.
Once you have determined these factors, you are ready to start your loan application. Make sure to input correct information on every loan application and be honest about your business's financial situation.