Wondering how do business lines of credit work? If yes, wonder no more. Business lines of credit work similar to credit cards. You access money up until your maximum limit whenever the need arises and repay with interest.
One cool thing about business lines of credit is that you pay interest only on the amount you withdraw. Sounds cool, right? If you run a startup, a business line of credit is an option to consider so you can get the funds you require. Digest this article to learn what business lines of credit are, how they work, and how to apply for them.
To know how business lines of credit work:
- Understand What Business Lines of Credit Are
- Know How Business Lines of Credit Work
- Grasp the Pros and Cons of Business Lines of Credit
- Master the Types of Business Lines of Credit
- Learn What Determines Business Lines of Credit Rate
- Know How to Apply for Business Lines of Credit
Ready to learn? Keep reading!
1. Understand What Business Lines of Credit Are
To know how business lines of credit work, understand what they are. Business lines of credit are revolving loans where you draw money you until a certain limit. You get a business line of credit from a bank, credit union or any other financial institution.
To get a line of credit effortlessly, you require reputable personal and business credit histories—especially if you apply for an unsecured business line of credit.
>>>MORE: How Business Lines of Credit Work
2. Know How Business Lines of Credit Work
To adequately finance your business, know how business lines of credit work. Thanks to your business line of credit, you receive access to a certain sum of money—$100,000, for instance—and you draw from that amount whenever you have a need to meet. You repay the amount you withdraw with interest and can withdraw again whenever you need to fulfill a business emergency need.
The charges on business lines of credit vary from one lender to another. For example, you pay some lenders origination fee, draw fee, account maintenance fee and inactivity fee. Before you apply for a business line of credit, check the fees associated with a particular lender and decide whether you don’t mind—or do.
3. Grasp the Pros and Cons of Business Lines of Credit
To fathom how business lines of credit work, know their pros and cons.
- Pros of business lines of credit
You’re probably considering a business line of credit, right? Let’s explore some benefits you stand to enjoy with a business line of credit:
- Flexibility. Withdraw just what you need on time to clear any needs with a business line of credit. This works way better than getting a loan, where you access a lump sum and accumulate interest.
- Cash flow. Avoid running out of money and keep money on the move to sort every emergency need that arises, including paying staff, covering renovation costs, etc.
- Credit worthiness. Get a business line of credit to qualify for better loans and boost your business's credit rating.
- Cons of business lines of credit
Before you apply for a business line of credit, understand some of its drawbacks.
- You can abuse it. You can overuse a business line of credit or use it for non-business related expenses.
- You need a good or an excellent credit score to get the best interest rate. If you have bad personal or business credit score, your pay more in interest to your lender. Also, you can't specifically know the overall interest rates you're paying—even if you have healthy credit score. Banks and other lenders add some additional fees and charges that increase your base interest.
- You may not get enough funds you require. Business lines of credit generally offer lower credit limit. So you may not get the enough capital you need for your business.
In all, before you apply for a business line of credit, ensure you do in-depth research, comparing lenders’ fees, charges, repayment terms, and conditions.
>>>PRO TIP: How Long Does a Business Line of Credit Last
4. Master the Types of Business Lines of Credit
To choose between secured and unsecured business lines of credit, know what they are.
For unsecured business lines of credit, you require a plausible personal and business credit scores so you can convince the lender your reliability to repay. If you fall short on a reliable credit score, consider a secured business line of credit. Here, you present collateral to your lender that is worth the credit limit you demand.
Think twice before you apply for a secured business line of credit. You forfeit your collateral legally to your lender if you default on payment.
5. Learn What Determines Business Lines of Credit Rate
Before you research business lines of credit lenders, know the factors that determine your credit rate. Understand that lenders have individual policies to determine your credit rate. Let’s check a few factors lenders check to fix your credit rate:
- Credit score. Generally, your credit history matters to all lenders, especially if you apply for unsecured business lines of credit.
- Business longevity. To set your credit limit for a business line of credit, lenders check how long you’ve run the business as well as the venture’s financial records.
- Business industry. Lenders like to know whether your business’s income is reliable, irrespective of any governmental policy. Businesses in the gambling or alcohol industry, for example, pose some levels of risks on lender because of constantly changing government policies that can negatively impact the business’s income.
>>>GET SMARTER: Business Lines of Credit 101: Everything You Must Know
6. Know How to Apply for Business Lines of Credit
To get a business line of credit, know how to apply. You now know what business lines of credit are, understand how lenders fix your credit limit, and master the types of business lines of credit, right?
Here’s how to apply for a business line of credit in a few steps:
- Make up your mind on how much you want. You can get anything between $2,000 to $250,000. Don’t forget, your lender determines how much you can get. But one cool thing is that since you only pay interest on the amount you draw from your line of credit (during the draw period, of course!), you can apply for a higher limit.
- Confirm if you’re eligible. Look at the lender’s requirements and confirm whether you qualify to apply.
- Compare lenders. Create a curated list of lenders and compare their terms, interest rates, and credit limits. Select the lender who offers the most favorable product you demand.
- Get your documents. Know the documents to submit in your application. Common information to gather are your name, business name, required loan amount, social security number, annual revenue, loan purpose, and business tax ID.
- Submit your application. Apply in person or online, depending on your lender. Keep in mind, before your lender issues your business line of credit, you will sign an agreement form after you receive an approval on your application.
Recap
Business lines of credit offer quick alternative way of sourcing funds so you can meet your venture’s emergency financial obligations. Understand what business lines of credit are, know how they work, and grasp their pros and cons. Then master the types of business lines of credit, learn what determines your credit rate, and know how to apply for them.
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