A business can apply for financial assistance just as a person can agree on terms with a lender. However, the process is different, and the options vary depending on your business type.
A business line of credit is a viable option to apply for financial support if needed. It is a process that can save the company from unexpected expenses. For this reason, we leave you a guide about business lines of credit.
What is a business line of credit?
The business line of credit makes it possible for a business owner to access funds at any given moment; the line of credit is available but used only as needed, unlike a loan where a single payment is made to the borrower.
When a company opens a business line of credit, it is usually to cover unexpected payments, such as an inventory purchase that was out of the company’s budget.
At the time of use, interest is paid on the money used, not the total money that may be available in the line of credit. In other words, you may have an unused credit in the line, so you will have to pay the interest rate.
Credit lines are similar in use to a credit card without the burdens of a loan to the company. Business lines of credit have a much higher capacity than a business credit card.
Lines of credit are renewed annually, and to apply, you must go through a review before credit acceptance.
Interest on the line of credit accrues as money is withdrawn, and as the amount of funds withdrawn is repaid, the balance becomes available to spend on the line of credit.
How to open a business line of credit
When opening a business line of credit, you will find a lot of information that can vary according to the requirements of the bank or lender, which are usually very different from bank to bank.
In accordance, it would be worthwhile to research the bank since they will have different credit line offerings. However, here is a small guide to consider when opening a business line of credit.
Knowing how much credit you need
The first step is to determine how much credit is needed for your immediate purposes. The amounts for a commercial line of credit can range from $2,000 to $25,000. Since the amounts are so different, you should study how much credit you need to request so that it matches the line of credit you need.
Credit interests are paid as the funds are used; so it is possible to ask for a higher limit to the one needed when opening the line of account.
However, it is wise to be cautious not to ask for a extremely high credit because it could be denied by the bank.
It is better to start with an affordable business line of credit and then request a credit enhancement; depending on your payment history, the lender may easily approve the enhancement request.
Know your business’ qualifications
Another important step before applying for a business line of credit is to know the company’s financial situation and study the requirements that the company can meet so as not to risk having the application denied by the bank.
Knowing the company’s qualifications will save you time and effort when applying for the business line of credit. Among what to know about the company, a few key pieces of information will help guide you to the type of line of credit you should apply for.
- Amount of time in business: The longer your company has been in business, the better offers you will receive from the bank. Many lenders require the applicant’s business to have been in operation for at least two years; other lenders require six months. But the more established the business is, the better investment option for the lender.
- Credit history: This step is significant since it will reflect whether the business complies with its financial obligations. Some lenders accept personal credit scores of approximately 580 to 600. However, the vast majority require a score of 680. The higher the credit score, the better the chances of obtaining a higher credit score for a lower interest rate.
- Income: It is necessary to know how much the business’s annual income is, the lender’s approval of the credit will depend on it.
Research and compare lenders for Business Line of Credit options
Once you have gathered information about the business and its needs, the next step is to compare the available options. It is important to determine which business line of credit is most appropriate for the business, whether short or long-term, the minimum requirements, the level of financing, and the interest rate arrangements.
There are two types of institutions where to ask for financing: banks are the traditional lenders. These are ideal if your company has a high credit score and a long history along with its annual revenues.
Another option is online lenders; if your company has not been in the market for so long and has lower revenues, it is best for your needs since it does not have as stringent requirements as the banks.
Prepare your requirements and submit your application
Once you have done your market research and have an option in mind, start gathering all the requirements to apply for the business line of credit.
The requirements will be financial statements, personal and business tax returns, current business licenses, personal and business bank statements, annual profit and loss statements, a business plan, and even the building lease where the business is located.
Once you have all the requirements, you can apply for financing and await approval. Once approved, you can start using the available credit.
References
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Kumok, Zina. “How To Get A Business Line Of Credit In 5 Steps – Forbes Advisor.” Forbes Advisor, https://www.forbes.com/advisor/business-loans/how-to-get-a-business-line-of-credit/.