Business Lines of Credit

 All businesses start with a great idea, and with the right source of funding, like a business line of credit, you can find the perfect financial safety net to keep your company moving forward.

A business line of credit is an all-purpose source of credit that can be used to pay business-related expenses. Unlike a business loan where payments are due on a regular basis in order to decrease the amount borrowed, a business line of credit for new businesses can be repeatedly used, much like a personal credit card. With high limits and moderate interest rates, business lines of credit requirements are a great way to pay for business essentials.

 A business line of credit is unsecured, meaning there's nothing tangible backing the loan, so funds can be used as needed to purchase supplies and inventory, pay bills, obtain low-cost equipment, or pay for any other business needs.

While there are no hard and fast rules for getting a business line of credit, the majority of lenders will want to see at least six months of business history and an annual revenue of at least $50,000.

Most loans, especially business loans, are secured loans. This means that the value of an asset, like a house, car, or piece of equipment, is securing the loan. If a secured loan can't be paid back, the lender may take the assets being used as security. Because business lines of credit are generally unsecured loans, a bank doesn't have any way to make businesses repay these loans. This is why it's important for companies to demonstrate they make enough money to pay back an unsecured business line of credit in order to qualify for a loan.

Unlike a small business loan, which is borrowed in one lump sum and paid back according to a repayment schedule, a line of credit is more like a revolving door. Similar to a personal credit card, the credit amount is the maximum you can borrow at any given time. Available credit is the difference between the maximum credit amount and any credit already spent.

Say you're granted a $10,000 line of credit for your business. If you use $5,000 of this amount in the first billing period, you'll owe $5,000 back to the lender by the billing due date. If you’re unable to pay the full amount, an interest fee will be included. Until this amount is paid, you'll only have the remaining $5,000 to use. However, once it's paid back, you'll again have $10,000 available to spend toward business expenses.

A loan, on the other hand, has a decreasing balance that goes away at the end of the lending period. If you borrow $10,000 to be paid back over five years, you'll be expected to make regular payments on a monthly basis for five years, plus interest. Every payment reduces the loan balance rather than freeing up credit for additional use.

How much you can borrow with a small business line of credit can vary. Factors like how long ago you started your company, how much money your company makes, and your own personal credit history can affect what kind of credit line a lender will give you. Most credit lines for corporate purposes range from $10,000 to $100,000, but can be more or less depending on the lender. Older, more established companies will usually qualify for more credit than a newer company that's just getting started.

• How Long Does it Take to Get Approved?

For those who need fast access to money, a business line of credit is generally a good option. The approval process is usually faster than with other forms of financing, with borrowers getting approved in as little as 24 hours or as long as two weeks. Again, as with all forms of financial lending, certain lenders will be faster than others. Most lenders offering business credit lines will advertise their expected turnaround times, so you'll have an idea of what to expect when applying.

In order to increase the likelihood of a fast approval, be prepared to fulfill all of the bank's requirements, including evidence of cash flow, proof of incorporation to demonstrate the age of your business and any other applicable financial information.

 All lenders have slightly different small business line of credit requirements, but most will want to see plenty of evidence that your company can make regular payments.

While a business line of credit doesn't have to be repaid in the same way a loan does, lenders don't make financial decisions hastily. Every year, thousands of small businesses default on loans or file for bankruptcy, leaving lenders to pick up the pieces. 

With most lenders, you can expect to present information that includes:

• A driver's license or other proof of identity
• A voided business account check
• Bank statements
• Financial statements, like a balance sheet and profit and loss statement
• Credit score information
• Personal and business tax returns
• A business plan or prospectus

This may seem like a lot of information, but this collection of documents can paint a strong picture of your personal financial health as well as the current and future performance of your business.

With a business line of credit, interest is only owed if the balance is not paid by the due date. For most credit lines, statements are issued once a month and show a closing balance. This amount is then due around 30 days later. If the statement balance is repaid in full, no interest is charged, which creates a risk-free way to use credit to fund business activities.

If the entire amount can't be repaid on time, businesses are required to make a minimum payment. They'll also be responsible for the interest that accrues on the remaining balance.

Business line of credit interest rates differ from one lender to another. How much money a business makes can also play a role. A business with strong cash flow, a dependable history and an owner with good financial sense will generally result in lower interest rates. Rates can range anywhere from 5% to 25%.

Say, for example, you have a credit line of $10,000 with an interest rate of 15%. If you use $2,000 of your allotted credit in a single month and pay it back in full the next, there will be no additional expenses. However, if a payment of only $100 is made, interest will accrue on the remaining $1,900 — around $23 for the month. This amount may seem small, but as the outstanding amount increases, so do the interest charge