It's always nice to know that you have access to a little cash if you need it. A business line of credit can be just the solution during times when cash is a little tight. However, understanding and obtaining a business line of credit can be a little intimidating. Here are the highlights of what you need to know.
What is a Line of Credit?
A line of credit is a loan that a bank will provide with a maximum loan amount (credit line). This can be a personal loan, a business loan or a line of credit against the equity owned on real estate (ie a home equity line of credit). Unlike a traditional loan, you can choose how much of the loan you want to use and you only pay interest on the amount you are currently using.
How much do they cost?
This can vary significantly depending on the financial institution, your credit health and the size of the loan. Most will have an origination fee and often have an annual fee for the ability to have the loan. These will largely fluctuate based on the size of the loan. Then there is the interest rate, which is based primarily on the current lending rates and your credit health.
Do I want one?
Many businesses find it helpful for times when cash is short or when trying to grow their business. They are helpful in times when you need some cash coverage and they cost less than most credit card interest. However, they are more expensive than most secured loans and are not intended for one-time purchases, such as vehicles.
How do I get one?
You’ll work with your bank for the approval process. You will complete an application where you may need to provide documentation such as financial statements or tax returns, so it’s helpful to have those up-to-date. They will then complete a credit check on all applicants. It can be advantageous to apply with the bank you or your business utilizes for other purposes, such as your business checking account. Often banks will have fewer requirements for smaller loan amounts. Larger lines of credit can require substantially more underwriting, which can be more costly and invasive. You may also be asked to provide collateral for the loan, especially if your credit score isn’t as strong or if it’s a higher amount.
Hint: Banks are becoming less willing to offer lines of credit, so you may want to consider how you communicate your need for the loan when applying. They would rather lend money to invest in a growing business than to help with cash flow problems.
What will this do to my credit?
This will affect your credit much like any new loan. You will see a credit inquiry at the time your credit is checked and then it will factor into the average age of your accounts and total available credit. If you don’t have an immediate need to use it, it could help your credit utilization (how much of your available credit you are using). As with any loan, on-time payments will help your score and late payments will hurt it.
Anything else I should know about?
All loans seem to be taking longer to process right now. If you think you may want to pursue a line of credit, plan ahead as it could take a month or more to get it set up.
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