7 Best Business Line of Credit Options

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How To Get A Business Line Of Credit

A business line of credit is a way of funding your business without immediately committing to traditional loan payments. A line of credit offers you immediate cash on an as-needed basis, which can be paid back out of cash from operations. Unlike a traditional loan, you won’t get a lump sum upfront that you have to pay back by a specified maturity. A business line of credit stands like a bank credit card, ready to provide needed funds at a moment’s notice.

A business line of credit can be a great source of go-to financing, and it typically offers a relatively low interest rate. However, it can be tough to get a business line of credit for bad credit companies. This type of financing is often best suited for more-established businesses with good credit histories. However, finance companies are known to be flexible, and companies of all types can get lines of credit or other alternative sources of capital to finance their operations. In some cases, other options might even be better for certain companies. In this review, we’ll examine all the ins-and-out of business lines of credit for various types of companies, including an examination of situations in which different types of funding might be more appropriate.


How to Get a Business Line of Credit for Startups

As a startup company, you’ll need financing to get off the ground. Although it would be nice to walk into a bank and get a small business line of credit to fund your operations, that avenue is likely closed for most true startups. Banks and finance companies only lend out money they think has a high probability of coming back, so a business line of credit for a new business is almost nonexistent. With a limited or nonexistent operating history, you just can’t demonstrate that you’re a good risk when you’re first starting out. In cases like this, your best bet may be to find alternative sources of capital, such as Seek Business Capital.

How Does It Work?

Although startups aren’t generally the target market of traditional banks, companies like Seek Business Capital actually prioritize newer and startup companies. In addition to providing a startup loan, Seek Business Capital can provide business consultants to help talk you through your current and future financing options. With a startup loan, you’ll get cash to get your business off the ground and will have to pay it back like a traditional loan. However, you may be able to get a flexible arrangement of some type with a specialized lender.

What Are the Rates?

Rates as a startup company are likely to be high. With no track record of paying back business loans, any lender will be taking a chance on financing your company. To be compensated for that risk, lenders will generally charge you higher rates.

You may be able to avail of special promotions with specialized lenders, however. Some alternative lenders like Seek Business Capital may offer an introductory 0% APR to help get you started, with a variable rate after the promotional period.

Am I Eligible?

Just like it can be hard for a startup company to get good interest rates on a loan, it can be hard for startups to even qualify for financing to begin with. Startups just don’t have the financial metrics that are the basis of any general business loan — namely, consistent and rising cash flow, a history of paying back loans and a long operating history. This puts startups in a tough situation off the bat.

However, like anything in life, financing isn’t completely one-dimensional. All successful startups end up getting financing of some kind, so if you can find the right lender, you can still get your startup loan.

The path to a business loan for many startups begins with a well-written business plan. A line of credit is usually still out of the question, but a good business plan may qualify you for alternative types of capital if it charts out the way that your company will make money. If your business plan pans out and your company does turn profitable, then you might be in line for a business line of credit down the road.

In addition to a good business plan, you’ll likely need to have solid personal credit for your startup to qualify for a loan, especially if you are a sole proprietor. Since there are no business financials to rely on, a potential lender will want to see that you yourself have a good track record when it comes to paying back your personal debts. Your personal credit history may not be a perfect indicator for the ability of your startup to manage its debts, but it’s another data point a lender can work with in the underwriting process. So, before you apply for a loan for your startup, it can only help if you get your personal credit in order.

One of the advantages of working with a company like Seek Business Capital is it understands the financial restrictions of startup companies and can work with them to find a way to get funding. However, you’ll still need to provide some concrete evidence that your company can pay back its loan. A strong personal credit history coupled with a clear path to profitability in a business plan can go a long way towards satisfying that need.

How Much Can I Get?

As a startup, you shouldn’t expect to have access to the large sums of capital that a well-established business might. And to some extent, that is actually a good thing. The last thing you need as a startup is to get in over your head when it comes to debt. If your debt service payments eat up too much of your cash flow, you won’t be able to get off the ground. Thus, any startup loan you can get should match your anticipated capability to make your payments.

That’s why it’s often a good idea for startups to work with specialized finance companies like Seek Business Capital. Although Seek grants loans of up to $500,000, in most cases you should anticipate approval at a much lower level. The important thing is that your loan amount matches your company’s financial profile and payback capability.

What Documents Do I Need?

As a startup, you likely won’t have much in the way of financial documentation to provide to potential lenders. However, even without comprehensive financial statements and years of tax returns, you’ll still need to provide some type of evidence that your business is or will be financially solvent and that you will have the wherewithal to pay back your loan. To that end, you should expect to provide the following documents at a bare minimum:

  • Your Social Security number for a personal credit check
  • Your startup’s business plan, with details as to how your company will generate profits
  • The specific use of your loan proceeds

Additional documentation is likely. You may be asked to put up some collateral to back up your startup loan, or you may be asked for a personal guarantee. You can speak with your lender about what might be required before you put together your complete application.

Remember that if you’re working with a nontraditional lender that focuses on startups, you’re likely to have more leeway in terms of what documentation you might need.

What Are the Terms?

As a startup, you may not be able to manage traditional loan payments right off the bat until you start generating some revenue. Since specialized lenders understand that cash flow for startups can be erratic, particularly at first, you may be able to negotiate a more flexible repayment plan than with a traditional loan. Loans for startups tend to be shorter-term in nature since that helps reduce risk for lenders. However, this can be a blessing in disguise, because if you can pay off your initial short-term startup loan, it will improve your credit profile for your next loan application.

Companies With Bad Credit

How to Get a Business Credit Line for Companies With Bad Credit

Companies with bad credit can find themselves in the same dilemma as startup companies when it comes to obtaining financing. In some cases, it can be even harder for companies with bad credit to get financing, because they’ve already demonstrated an unwillingness or inability to pay back borrowed money. In most cases, a business line of credit will be hard to come by, at least not one with outrageous terms or rates. However, the world of financing is full of creative ways that companies can finance their operations. For companies with bad credit, a merchant cash advance may be the best choice.

How Does It Work?

One of the benefits of using a cash advance as a company with bad credit is that your credit history essentially doesn’t matter. That’s because a merchant cash advance isn’t technically a loan. As the name implies, with a merchant cash advance, companies receive funds in advance of when they normally would. This is accomplished via a sale of incoming receipts, not a loan. In exchange for some of your incoming debit and credit card sales, a lender will front you the money before those receipts are paid. In essence, you receive current cash in exchange for future sales.

What Are the Rates?

Merchant cash advances represent fast money, and fast money is often expensive money. You can expect to pay higher rates and fees on a merchant cash advance transaction than you might on a traditional loan. Of course, if your company credit is already bad, you might not even qualify for a traditional loan, or you might only be able to get one with very high rates, so a merchant cash advance may still be a reasonably affordable option.

A merchant cash advance is typically expressed in terms of a factoring fee. Factor rates typically run from about 1.14 to 1.18, which equates to a starting annual interest rate of about 14%. This is an annual rate, but most factoring companies charge on a monthly basis, in the neighborhood of a bit over 1%. Your final rate will be based not so much on your credit history as the size and consistency of your monthly receipts.

Am I Eligible?

For companies with bad credit, merchant cash advances can be an ideal funding source because credit history doesn’t play much of a role. If you can demonstrate that your company has incoming debit and credit card receipts, particularly recurring payments that aren’t likely to change, you’ll generally be able to qualify for a merchant cash advance. It certainly doesn’t hurt if you’ve got large cash reserves and if your credit is on the mend, but the consistency and size of your ongoing revenue stream is the most important factor for eligibility.

How Much Can I Get?

The size of your merchant cash advance will largely be based on the size of your incoming revenue. You may find some finance companies that are willing to advance nearly the entire amount of your anticipated receipts. However, as with all financing, just because you can get funding doesn’t mean you should take all of it. You should keep your funding request to an amount that won’t siphon away too much of your incoming cash flow.

Imagine a scenario in which you’ve been advanced $100,000 for the following month, but you suddenly lose some of your larger customers, or they go on holiday, or for whatever reason your receipts fall. If you have to use 100% of your incoming cash flow to pay off your prior merchant cash advance, your business could come to a standstill. Remember, in addition to the amount you borrow, you’ll also face interest and fees, so you’ll have to factor that into your calculation. As a business owner, it’s your obligation to only extend your company’s finances to a prudent limit, no matter what a lender may offer you. You may want to consider working with a tax or financial advisor to help you determine an appropriate financing amount.

What Documents Do I Need? Since a merchant cash advance isn’t technically a loan, you won’t have to worry about coming up with the extensive documentation that you might need with a traditional loan. The health of your business is the most important factor in getting a merchant cash advance, rather than your general credit or collateral. A high level of recurring sales is often enough to qualify you for a merchant cash advance.

Since major documentation is not required, a merchant cash advance can often be applied for online. Cash can be delivered in a matter of days or hours, rather than weeks or months. The tradeoff is that the convenience of this type of money is usually more expensive.

Here are some of the documents you should have ready when you apply for your merchant cash advance:

  • Business cash flow statements
  • Business tax returns
  • Voided business check
  • Driver’s license
  • Credit card processing statement

These are standard requests for a merchant cash advance, but you might be asked for additional documentation, such as bank statements or a credit report. Even in those cases, your business cash flow will generally still be the most important factor.

What Are the Terms?

Merchant cash advances typically operate on a rolling basis. Once you get your first cash advance, you pay it off with the following months’ receipts, receiving new cash infusions as needed. Some businesses pay off their cash advances over a few months, while others pay them back on a monthly basis as they receive new receipts. There’s not generally a down payment involved with a merchant cash advance, but you may face setup or ongoing maintenance fees in addition to interest.

Companies With Significant Assets

How to Get a Business Credit Line for Companies With Significant Assets

Companies with significant assets are often well-established businesses that can qualify for a business line of credit. However, other options are available that might be an even better fit. With a portfolio of sizeable assets, you may be able to leverage those assets into a collateralized or equipment loan. This is particularly true if your company is asset-rich but has irregular cash flow. By collateralizing your current equipment or financing new assets as you acquire them, you may be able to avail of better rates.

How Does It Work?

If you’re an asset-rich company, it usually means that you have to buy equipment regularly. While some companies can pay off equipment with cash, for many others it makes sense to finance or lease equipment. This way you can protect your monthly cash flow while still using your new equipment to generate revenue and profits for your business. A business line of credit can also be an option, but you may get better rates if you borrow against your assets as your loans will be collateralized.

What Are the Rates?

Since equipment or asset-back loans are collateralized, lenders take less risk than if they extend an unsecured business line of credit. This can keep your interest rate lower, often in the 3% to 7% range. A number of factors can affect whether your rate will at the lower or higher end of this range, including the type and condition of the equipment you’re using as collateral. If your business also has large cash reserves, this can keep your rate lower.

Am I Eligible?

Another plus that an equipment loan can have over a business line of credit is that it can be easier to qualify. If you apply for a general business line of credit, you’ll usually need to have good credit, high cash flow and a consistent, established record of profitability. Equipment loans, on the other hand, use your assets as collateral. Since a lender can seize that collateral if you can’t make your payments, risk to the lender is lessened. This means that even businesses with low-to-moderate credit ratings may be able to get approved for an equipment loan.

How Much Can I Get?

One additional benefit of an equipment loan over a business line of credit is that you’re not likely to get overextended. While a general business credit line might have a high limit, your equipment loan will be limited by the amount of the equipment you’re financing. Often, lenders will loan up to 80% or 90% of financed equipment, although some may go as high as 100% in certain circumstances. The better your company’s credit history and the higher your level of cash reserves, the higher the loan-to-value you’re likely to receive.

What Documents Do I Need?

Since an equipment loan is based primarily on collateral, rather than general unsecured credit, the application process is generally easier. You won’t have to demonstrate to a lender that you have the credit capabilities to take on an open-ended business line of credit, since your loan is tied to the equipment you’re financing. Rather than having to pursue your general corporate assets in case of a default, a lender will simply repossess your equipment.

That being said, using collateral to back up your loan doesn’t mean you won’t have to provide additional financial records to your lender. If you do indeed have good credit, a long and solid business history and a high level of cash reserves, that can only help your loan application, even for a collateralized loan.

Expect to provide at least these basic documents:

  • Personal and business tax returns
  • Business and personal bank statements
  • Business profit and loss statements
  • Information about your equipment/collateral
  • With a business line of credit, you’ll need the above information plus additional documentation about the credit status of your business.

What Are The Terms?

The terms of an equipment loan are typically tailored to the useful life of the underlying assets. For example, if you buy a vehicle with a useful life of 10 years, you can likely get financing for up to 10 years. This is in contrast with a business line of credit, which can be a standing line with no specific terms.

Seasonal Companies

How to Get a Business Line of Credit for Seasonal Companies

A seasonal company is one of the types of businesses that can be tailor-made for a line of credit. By definition, a seasonal company has irregular cash flow, so taking out a standard loan can be a bad move as payments will be due even if the business isn’t generating much revenue. A business line of credit, on the other hand, can be used at will, in accordance with seasonal cash flow.

How Does It Work?

A business line of credit is like a credit card that can be drawn upon at a moment’s notice. You won’t be charged interest until you start drawing on the line, although you might have to pay a fee to set it up or keep it available. Even without collateral, business line of credit rates can be low, since it can take top-tier credit to get an unsecured line.

Although a business line of credit offers rapid financing, it’s best to plan ahead when it comes to applying for one. Just like a traditional loan, you’ll need to go through the application and approval process for a line of credit, so you’ll want to get one set up during good times when you don’t quite need the money yet.

What Are the Rates?

Since a business line of credit is often only available to companies with a track record, the good news is you can often get a good rate on one. Companies with pristine credit and strong financial histories can get the best small business lines of credit, with rates of about prime + 1.75%, while those with middling credit might pay rates in the double digits, if they can get approved at all. Of course, positive factors like high cash reserves or a long operating history can go a long way towards not only getting a business line of credit but also getting a low interest rate. It’s always a good idea to shop around when you’re looking for any type of loan, including a business line of credit, so you can negotiate the best possible rate for your company.

Am I Eligible?

Eligibility for a business line of credit is closely tied to your company’s financial history, including factors such as cash flow and profitability. The more established your business is, the more likely you are to be eligible. The size of the credit line you’re seeking can also play a role in your approval odds. If you’re looking for a $5 million unsecured line of credit and your company is only doing $50,000 per year in revenue, you should expect a rejection. However, if your requested credit is more in line with your company’s financial capabilities, you’re more likely to be approved.

How Much Can I Get? Just like your overall approval odds can be affected by the size of the line you’re requesting, you’re more likely to get a higher line of credit if your company’s got the finances to support it. A number of factors will go into determining the size of your credit line, including your debt-to-income or cash flow ratios and your intended use of the line of credit. If you’re a large, international company pulling in millions of dollars, that fabled $5 million line of credit can actually be fairly accessible.

When applying for a line of credit, work with your financial and tax advisors to tailor the size of your line to your company’s needs. Just because one lender is willing to offer you a $5 million line of credit doesn’t mean it’s the best thing for your company. With an oversized line of credit, you might overextend your company’s finance if you’re not disciplined. If you pour it all into a major expansion, for example, the payments on your line might overwhelm your cash flow, putting you in a bigger financial hole than you were in when you borrowed in the first place.

What Documents Do I Need? Applying for a line of credit can require extensive documentation, even in the case of businesses that can be expected to qualify easily. A business line of credit is unsecured, so your lender is essentially taking your word that your company will pay back whatever it borrows. You’ll have to demonstrate in black and white that your company’s financials are strong enough to pay back whatever you might borrow. As these types of applications can be lengthy, you can’t usually apply for a business line of credit online. You should expect to have a face-to-face meeting in person with a loan officer.

Business line of credit requirements can vary greatly from lender to lender. However, certain types of paperwork requests are fairly standard. At the very least, you should expect to provide some or all of the following types of documentation on your line of credit application:

  • Business tax returns
  • Business cash flow statement
  • Business bank statements
  • Business balance sheet
  • Business profit and loss statement
  • Business net worth statement

Any information you can provide that paints your company as a low-risk borrower can help you get approved, at with favorable terms. Your financial advisor or tax advisor can help you determine what documents put your company in the most favorable light.

What Are the Terms?

Business credit line terms can be fairly flexible and are established by individual lenders. You won’t have to start making payments on your credit line until you draw from it. Unlike with a traditional loan, in which monthly payments typically begin immediately, a line of credit stands at the ready until you actually tap it. At that point, your repayment terms will kick in. You may have to pay back your line within a few months or within a few years, depending on your lender. In any case, the faster you can pay back what you draw down, the less you’ll pay by way of interest expense. Note that even if you haven’t yet tapped your credit line, you may have to pay setup or maintenance fees.

Companies With Good-to-Excellent Credit

How to Get a Business Line of Credit for Companies With Good-to-Excellent Credit

If your company has good-to-excellent credit, a business line of credit can be an excellent fit. You may have lenders competing with each other to give you better terms, since a company with good-to-excellent credit is a good bet for financiers. Here’s how a business line of credit might be a good financing option for this type of company. ** How Does It Work?** You can think of a business line of credit as something like a credit card, but usually with much lower interest rates. At any time, you can draw money from your line up to its limit, at which point you’ll start paying interest on what you borrowed.

Although business lines of credit are unsecured loans, they can still come with low interest rates, especially if your company has good-to-excellent credit. The reason is that lenders want to work with companies that have top-tier credit because it makes it more likely they’ll be paid in full.

A business line of credit requires an application just like a traditional loan. Once you’ve established the line, you can draw it for immediate funding at any time. However, it can take time to establish the line in the first place, so you should apply for it before you anticipate needing it.

What Are the Rates?

With good-to-excellent credit, you can get a business line of credit for a relatively low rate. Companies with top-tier credit can access rates of about 1.75% over the current prime rate, perhaps even lower. With only “good” credit, your rate will likely be higher, but it should still be better than the double-digit rates that may get offered to companies with average credit. A strong credit profile, backed by years of consistent and rising cash flow, can help your company get the best rates available. Don’t be afraid to leverage the power you wield as a company with top-tier credit; as companies will be vying for your business, you may be able to negotiate even better rates.

Am I Eligible?

Business cash flow and profitability are important factors in determining eligibility for a business line of credit. However, if your company already has good-to-excellent credit, you’ll likely have no trouble qualifying for a business line of credit. The only factor in your application may be the size of the line you’re seeking. You should only expect to be eligible for a line of credit that your company can financially cover.

How Much Can I Get?

The size of your business line of credit will be commensurate with the financial capabilities of your company. If your company has good credit and generates millions of dollars per year in free cash flow, your credit line can likely run into the millions of dollars as well. If your company has good credit but erratic cash flow or low revenues, your line will shrink accordingly.

If your company has good-to-excellent credit, you should be leery of lenders that offer you grossly inflated credit lines in an effort to compete for your business. While it may seem like a good idea to take on the biggest line of credit you can, that can lead to overspending. Imagine if you generate $1 million in revenues every year but have a credit line for $10 million. If you were to draw down the full amount of that line, your revenues couldn’t sustain your payments. With a restricted cash flow, your business might stop dead in the water. To avoid these types of situations, it’s best to tailor your credit line to the financial capabilities of your company. For help in determining how much that might be, you should work with your financial and tax advisors.

What Documents Do I Need?

Even though your business has good-to-excellent credit, you’ll still need to provide documentation that you can pay back your line of credit. This documentation will come in the form of various business financial statements, including the following:

  • Tax returns
  • Cash flow statements
  • Balance sheets
  • Bank statements
  • P&L statements
  • Net worth statements

These are basic requirements only; individual lenders may request additional information. The more you can provide, the better, as if your company already has good-to-excellent credit, the financials of your company are likely to impress lenders and get you qualified. The nature of an unsecured business line of credit means you’re most likely looking at an in-person sit-down with a bank loan officer if you want to get approved, rather than a simple online application.

What Are the Terms?

A business line of credit can have flexible terms, since it’s not a traditional loan with a regular payback schedule. Although you may have to pay a fee to set up or keep your credit line open, you won’t have to pay any interest until you actually draw down some of the line. Once you’re actually borrowing money from your line, interest charges will begin, and payments will be required. Your lender can help you tailor these terms to the needs of your business. You may be required to pay back your loan within a few months or a few years; in some cases, your line might operate like a credit card, with no formal due date but with regular monthly payments required. In any event, the sooner you can pay back what you borrow, the less you’ll have to pay in interest.

Companies With 3-4 Years of Financials

How to Get a Business Line of Credit for Companies With 3-4 Years of Financials

Companies with two-to-three years of financial history are in something of a no-man’s land when it comes to business financing. As you’re past the startup phase, you may not be of interest to angel investors and startup finance companies; however, although your business may be profitable and even thriving, you may not quite be at the point where traditional lenders would feel comfortable offering you an unsecured line of credit. In this case, your best option may be to turn to the Small Business Administration.

How Does It Work?

The Small Business Administration has a mandate to assist businesses with education, financing and general support. Although SBA loans are popular, the name is a bit of a misnomer. The SBA itself doesn’t actually loan money to companies; rather, the government agency works to match up lenders and borrowers for the purpose of encouraging corporate loans. To encourage lenders to participate, the SBA guarantees up to 85% of a loan’s value, taking lenders off the hook to a large degree if a borrower defaults. Part of the reason the SBA can do this is that it rarely works with startup companies or businesses with less than three years of financial history. This puts a company with three-to-four years of business history in the sweet spot when it comes to the SBA loan program.

What Are the Rates?

Maximum loan rates in the SBA loan program are published and easily accessible. These rates cannot be exceeded by partner banks in the program, but they can be lower if you can negotiate with your lender. Here are the current maximum terms as specified by the SBA:

Loans Less Than 7 Years

  • $0 - $25,000 Prime + 4.25%
  • $25,001 - $50,000 Prime + 3.25%
  • $50,001+ Prime + 2.25%

Loans 7 Years or Longer

  • $0 - $25,000 Prime + 4.75%
  • $25,001 - $50,000 Prime + 3.75%
  • $50,001+ Prime + 2.75%

These rates are generally lower than what you might find if you tried to take out an unsecured business line of credit as a newer company.

Am I Eligible?

The SBA Loan Guarantee doesn’t mean that you’re guaranteed to qualify for a loan. You’ll still have to apply and qualify for a loan based on your company’s financial merits. On top of that, you must meet the minimum requirements established by the SBA. The three broad strokes mandated by the SBA include having a sound business purpose, demonstrating the ability to repay the loan and qualifying as a “small business.”

Additionally, you must be personally invested in your business and you must have been declined for other types of financing. Businesses in the three-to-four year window typically have little trouble meeting these requirements because they are usually owned by sole proprietors or other owner-investors and they often still have trouble qualifying for financing on their own.

The SBA defines a “small” business by various metrics. Depending on the type of business, the SBA uses either annual revenue or number of employees as the determining factor. In most cases, businesses generating $1 million or less in annual revenue qualify as small businesses. This is not always the case, however; in some large industries, the cutoff for revenue is as high as $41.5 million. In terms of number of employees, companies with between 100 and 1,500 employees may be considered “small” depending on their industry.

How Much Can I Get?

The maximum loan amount in the SBA program reach $5.5 million, but loans as small as $500 are funded. Most small businesses won’t qualify for the $5.5 million figure, which is reserved for well-funded businesses with the ability to pay back a sum of that amount. You shouldn’t focus too much on the maximum amount allowed anyway, as you should only borrow what your company can afford to pay back. If you take out a loan that’s larger than your business can handle, the drain on your monthly cash flow could cripple your business. In addition to the large monthly payments, interest charges will be higher if you take out a larger loan as well. The bottom line is that regardless of what you may qualify for, you should only borrow the amount that you actually need.

What Documents Do I Need?

Documentation for SBA loans can be extensive. In addition to the minimum requirements that you’re a person of good character and your business is being operated in a for-profit manner, your credit, ability to repay and your company’s management team will all come into play on your application. One of the reasons for the extensive documentation is that the SBA will be guaranteeing a large portion of your loan. Here are some of the documents you should expect to provide:

  • Borrower information form
  • Personal background and financial statement
  • Business financial statement
  • Business certificate/license
  • Loan application history
  • Income tax returns for the last three years
  • Resumes for each principal
  • Business overview and history
  • Business lease

The SBA notes that in some cases, such as if you are purchasing an existing business, additional documentation may be required.

Just as with any loan application, if you’re able to provide even more documentation showing the financial strength of your company, your odds of approval will rise.

What Are the Terms?

In addition to publishing loan rates, the SBA also posts its loan terms. Real estate loans are the SBA loans that carry the longest terms, with maturities of up to 25 years. However, the typical SBA loan runs from five to 10 years. Remember that you may want to keep your SBA loan term under seven years, as longer loans carry a 0.50% interest rate premium.

Established Companies With 5+ Years of Consistent Revenue

How to Get a Business Line of Credit for Established Companies

From a credit standpoint, you’re in an enviable position if you’re a company with five or more years of consistent revenue. With proven cash flow, profitability and a track record of paying off past debts, you’re a very low credit risk in the eyes of lenders. This means that any type of financing you desire is likely available to you, including the best business lines of credit, as you’ll no doubt qualify for low rates.

If you’ve been running your business for a long time and have at least five years of consistent revenue, congratulations! Your business is essentially the gold standard in the eyes of potential lenders. With a proven ability to repay your loans and generate cash flow, it’s highly likely that you’ll meet your future credit obligations. Thus, you’re a low risk in the eyes of potential lenders. This means that you’ll likely have access to any type of credit that you desire. In this scenario, a business line of credit may be a good option, as you’ll no doubt qualify for low rates but you won’t have any obligations until you actually draw down the line.

How Does It Work?

A business line of credit is like a credit card, but better. Business lines of credit often have low interest rates, and this will definitely be true if your business has stellar credit. Once you establish your credit line, it stands at the ready for whenever you need to draw on it. You can get funding at a moment’s notice from your credit line, at an interest rate that’s much lower than most business credit cards.

What Are the Rates?

As a company with a long track record of consistent profits, you’ll likely get the lowest rates available on a business line of credit. Even better, you may be able to negotiate an even better rate if you have multiple lenders competing for your business. Top-tier companies with great credit can get a business line of credit for the prime rate + 1.75%, or even lower.

Am I Eligible? If you’ve got five or more years of consistent profit, you’ll likely be eligible for any loan you want, including a business line of credit. You’ll still have to jump through the same hoops as everyone else though, including filling out an application. You might need more documentation if you’re looking for a large, multi-million dollar credit line, but you should still expect to be eligible.

How Much Can I Get?

As a consistently profitable company, you can likely get a large line of credit. However, no matter how long you’ve been profitable or how good your credit is, you shouldn’t expect — or want — a credit line much more than your revenue can support. For example, even if you’re a well-established company, if your business only pulls down $250,000 per year in profit, you shouldn’t go looking for a $5 million credit line. However, rest assured that if you do have top-tier credit and your company generates millions of dollars in profits per year, a $5 million line of credit isn’t that unusual.

When applying for a business line of credit, the more important question may be “How much should I get?” rather than “How much can I get?” Although a large standing line of credit can help get you out of any short-term financing jam, if you use more of that credit that you can afford, you might put your company in a bad financial position. Even though you don’t have to draw on the whole credit line at any one time, it’s best to keep your maximum drawdown limit at an amount that your business cash flow can support.

What Documents Do I Need?

Extensive documentation is needed to apply for a business line of credit, even for well-established companies. Even if you’ve got a great credit history, you’re still asking for an unsecured loan from a lender. If you were to go bankrupt and default on your loan, your lender would be out of luck, having no collateral to seize to pay off your loan. Thus, you’ll need to provide thorough documentation that you have the ability and willingness to pay back whatever you borrow. To that end, you’ll need the following documents for your line of credit application, at the very least:

  • Business P&L statements
  • Corporate tax returns
  • Business balance sheet, cash flow and net worth statements
  • Business bank statements

Specific additional requirements can vary from lender to lender.

You should prepare to meet a loan officer face-to-face to apply for a business line of credit, particularly if you’re looking for a large amount. These types of loans typically require more documentation that can be processed via a simple online application.

Coming from a position of strength, you should lean on your company’s solid operating history to help negotiate the best possible terms for your line of credit.

What Are the Terms?

An additional benefit of a business line of credit is that the terms can be fairly flexible. Generally, however, your business line of credit will come with an establishment fee and/or a maintenance fee. You won’t pay interest until you actually access the line. At that point, any of a number of terms may apply. You might be required to begin monthly payments immediately, with the loan paid off in full after a certain number of months or years. Other banks may operate your line like a credit card, with no final maturity date but with required monthly payments until your balance is paid in full, with interest charges accruing until payoff.

However your line of credit is structured, the faster you can pay off your balance, the more you’ll save in interest expense.


About Business Lines Of Credit

Business lines of credit come in different forms, so it’s important to know how they work and what types may be available before you apply for one. Here’s a look at some common questions about business lines of credit.

How Does A Line Of Credit Work?

A line of credit is a type of on-demand financing. After approval from a bank, a line of credit stands available to be used by a borrower at any time, up to the credit line limit. Interest is only charged on amounts used, although there may be fees to set up or keep a line open, even if no money is ever drawn.

What Is A Business Line Of Credit?

A business line of credit is like a personal line of credit but used for business purposes. Business lines of credit can have lower interest rates than personal lines of credit because a business has regular revenue and cash flow.

How Does A Business Line Of Credit Work?

A business line of credit works just like a personal line of credit, except it’s tied to your business. You’ll likely be restricted to using your line of credit for business purposes only, such as purchasing new equipment or meeting short-term cash needs.

How To Get A Business Line Of Credit?

You can get a business line of credit at most banks or alternative sources of capital like Seek Business Capital. Getting an online business line of credit can be hard to do; you may be able to start the application process online, but you’ll generally have to meet with a loan officer in person to complete the transaction. Minimum credit score requirements will likely apply.

Is A Business Line Of Credit A Good Idea?

The concept of a business line of credit is a good idea. For a business to have a ready line of cash available can help reduce the stress and strain of irregular cash flows, non-paying customers or simple lulls in business. Without a line of credit, some businesses might not have the cash flow to pay for new equipment or other business needs, particularly during economic slowdowns or erratic revenue periods.

Actually using a business credit line, however, is not always a good idea. If you’re using your business line of credit to finance investments, purchases or other costs that can’t reasonably be satisfied with regular cash flow, you might end up overextending yourself. Prudence should be used whenever you feel the urge to tap your credit line.

Business Line Of Credit Pros And Cons

Like most financial arrangements, a business line of credit has both pros and cons. If judiciously used to meet your short-term financial needs, a business line of credit can be beneficial. However, it can prove to be expensive if not used properly. Here’s an overview of the pros and cons of a business line of credit.

Pros Low interest rates for companies with good credit Rapid funding once approved and set up No interest charges until line is actually tapped

Cons May be ongoing fees, even if you don’t access the credit line May not be available — particularly at a reasonable interest rate — unless you have good or better credit Can be tempting for companies without financial discipline to overspend Application process can be thorough

The bottom line is that a business line of credit can be a low-cost source of funding for companies that qualify — just beware of any maintenance fees. However, you will have to jump through some hoops to apply for and establish a line. Decent interest rates are usually reserved for business with good credit and longer operating histories.

How Can I Get A Better Interest Rate On My Business Line Of Credit?

The rate on your business line of credit is based on your company’s financial strength and history. If you’ve got a long history of generating profits and paying off all your debts on time, you’ll be in line for better interest rates. Credit is built over time, so if your company currently has bad credit, you might have to take on higher interest rates at first. However, if you can successfully pay back your first few high-interest loans, you’ll likely qualify for better rates down the road.

Certain activities or characteristics can also help you negotiate a lower rate, even if your company doesn’t have top-tier credit. Large cash reserves or a personal guarantee, for example, may help you get a line of credit with a better rate.

What Are Some Of The Risks Involved In A Business Line Of Credit?

One of the primary risks of opening a business line of credit is that you’ll overextend your company’s finances. Since a line of credit is easy to draw upon, some companies begin overusing credit lines to finance operations or purchases that should ideally be funded through day-to-day cash flow. Unexpected business slowdowns can strain the cash flow of companies that are making debt payments, and added interest charges can prove costly over the long run, so a business line of credit needs to be used judiciously

What Is A Term Loan?

A term loan is an agreement between a lender and a borrower that many people think of as a traditional or standard loan. Although there can be infinite variations, the typical term loan definition includes a fixed maturity date and a fixed interest rate. Maturity dates commonly vary from one to 10 years, but may extend as long as 30 years. Payments are generally made monthly until the obligation is satisfied in full.

What Is A Business Term Loan?

A business term loan has the same structure as any other type of term loan, but the proceeds are used for business purposes. Business term loans are often used to finance specific projects, with the terms of the loan tailored to the needs of the project. For example, a business may take out one term loan to finance a plant expansion and another term loan to subsidize an equipment purchase.

Fixed Vs. Variable Interest Rate

Although most term loans carry fixed rates, some may have variable rates. With a variable-rate loan, the interest paid can rise or fall according to the terms of the loan. For example, a term loan might have an interest rate of “prime rate + 1.75%,” meaning that the interest rate on the loan may rise (or fall) based on adjustments in the bank’s prime rate. A variable interest-rate loan can be risky for borrowers in a rising-rate environment, as the floating interest rate may dramatically increase the cost of the loan. To compensate for this risk, some variable-rate loans are initially priced at rates lower than those currently available on fixed-rate loans.

Features Of A Term Loan

The two main features of a term loan are its maturity date and its interest rate. The maturity date is the date when the final payment for the loan is due. The interest rate determines how much interest a borrower has to pay to take out the loan. From these two features, you can calculate the amount of your monthly payment.

APR Vs. Interest

A loan’s interest rate determines how much interest you pay on a loan, while its annual percentage rate, or APR, incorporates the total cost of your loan, including any additional fees or expenses. For example, if you take out a 10-year term loan for $50,000 at a 6% interest rate, you’ll pay $3,000 per year in interest. If you also have to pay an annual maintenance fee of $300, then your APR on that loan jumps up to 6.6%. A loan’s APR will always be equal to or higher than the nominal interest rate.