Obtaining financing for a business is one of the most challenging aspects of starting and running a business. As a result, two of the most common reasons why most businesses fail are cash flow and starting off with too little money. For this reason, 43% of businesses apply for additional funding to continue their business, which begs the question, which business funding solutions should you consider?

Have you thought about a small business line of credit? About 85% of businesses seek loans or lines of credit to fund their business, as opposed to credit cards or factoring. A business line of credit is one of the best business funding solutions, especially for people looking for flexibility and control of their money.

So, what’s a business line of credit, and how does it work? In this post, we’ll guide you through everything you need to understand about this type of business funding and how you can use it to your advantage.

What Is a Business Line of Credit?

A business line of credit loan is a type of business financing that allows you to access funds on an as-needed basis.

Essentially, this means that you will not receive a lump sum of money from the lender, and you can only withdraw a little at a time when you need to, for whatever you need to. Given that a small business line of credit is typically a lower amount compared to a term loan, it is most suitable for immediate short-term expenses and not long-term investments.

Business line of credit comes in two different categories, which are revolving and non-revolving.

Revolving business lines of credit replenish after withdrawals are paid, while non-revolving do not replenish. To get a better understanding of this, for a revolving line of credit, suppose you get a maximum of $50,000.

When you withdraw $10,000 to cater to your needs, the account will be left with $40,000. Once you pay back the $10,000, the amount will replenish back to $50,000. However, when it comes to non-revolving loans, the amount will still remain $40,000 even after you pay back the $10,000.

Secured Business Line of Credit

When you take out a secured business line of credit, the lender puts a lien against a business asset, in which case the asset will be used as collateral when you default. What makes this one of the best business funding solutions is that you typically get a higher credit limit and lower interest rates. Lenders can take equipment, inventory, or property as collateral depending on the amount of credit.

Unsecured Business Line of Credit

An unsecured business line of credit, on the other hand, comes with higher interest rates. Since there is no collateral, they tend to be more risks, and it’s a lot more difficult to qualify for most small businesses. To get this kind of loan, you need to have a positive business track record and a strong credit score.

How a Business Line of Credit Works

Business lines of credit vary from three months to 5 years, and the payback schedules usually vary between lenders. Some could ask for monthly or weekly payments, while others will go as far as to ask for daily payments. Once you open a line of credit, the lender will give you access to a reserve with the amount of money requested.

The lender will provide you the monthly invoice that reflects the amount of credit you used, along with all the interest charges. The payments you make will be based on the actual interest you accrue on the funds you use and not the amount in reserve. The interest rates will also vary and will be set by your lender depending on your risk grade, servicing requirements, and whether you put up collateral.

Apart from the interest rates, most lenders also charge an annual fee. It’s imperative that you inquire about all the transaction fees that apply if you’ll be making a significant number of repayments.

When to Get a Business Line of Credit

Navigate no, but a line of credit is one of the best business funding solutions, when is the best time to get one? If you’re currently having cash flow troubles and regularly require money to cover short-term expenses, then it’s a good time to get a business line of credit.

Maybe you’re having trouble with meeting the day-to-day basics of running your business. Maybe you found a great business opportunity that you need to act on immediately. In both cases, getting a line of credit makes sense.

What Does It Take to Qualify?

Just like most other small business loans, qualifying for a business line of credit, it’s not as easy as most people would like it to be. When you have collateral to put up, then it can be a piece of cake. However, it will get harder to qualify the amount you need for your business if you don’t have anything to put up.

When you apply for the loan, you need to have a personal credit score, bank account information, business financial statements, as well as business and personal tax returns. Additionally, the lender may ask you for information that identifies your business, such as the Employer Identification Number.

The Pros of a Line of Credit

All business funding solutions come with pros and cons, and a business line of credit is no exception. One of the most significant benefits of getting this type of business funding is the fact that you only pay interest on the borrowed amount.

The next best thing about it is that you can access the loan even with poor credit. Beyond that, you get fast access to the money you need, and even better, you can use the money for a variety of purposes for your business.

The Cons of a Line of Credit

On the downside, getting this type of business funding is more expensive compared to most other loan options. The interest rates could be extremely high, depending on whether you have collateral or not and how good your credit score is.

Even worse, if you happen to miss a payment, there’s a chance that it will go over your limit, and the lender may impose fines for it. You will also have to deal with numerous fees because it’s not uncommon to come across annual fees, as well as monthly transaction and maintenance fees.

Choosing the Best Business Funding Solutions

If you’re strapped for cash, a business line of credit is one of the best business funding solutions you can go for. This type of business funding will help you maneuver your business without having to worry about cash flow and the day-to-day business operations until you get things back on track.

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