Finding the right type of funding for your business depends on many factors, but there is no shortage of options, including bank loans, credit cards, crowdfunding, Small Business Administration loans, office equipment financing and leasing, merchant cash advances and lines of credit.
So, what should you choose? Well, businesses looking for flexible funding that can improve their credit rating and that can be used again and again might find a line of credit attractive.
What is a line of credit?
Similar to a credit card, a line of credit allows your business to borrow up to a set amount while paying interest only on the money being borrowed. You can choose how much to draw at a time, and then make payments and borrow again.
Some lines of credit have a limit and some are open, according to Liberty Capital Group. Most are revolving, meaning funds replenish after you repay them.
This is different from a term loan, which is a one-time loan with a set repayment plan. With a line of credit, you’ll have a certain amount of time during which you can withdraw money. Your lender may give you a card, checks or the ability to transfer money to a checking account.
Minimum qualifications
Most lending institutions have qualification requirements for a line of credit, including a good credit score, strong cashflow, and a history of being in business.
What a lending institution considers a good credit score varies, but Nerdwallet estimates most borrowers need a score of at least 500.
As for cashflow, the higher it is, the greater the amount you can access. In fact, it’s when you have your highest cash flow that you should apply.
“Banks are ready to provide loans when you have a strong cashflow and you are not too desperate to get the money,” Liberty Capital Group said.
Some lenders require a business to have been running for a certain amount of time, from a few months to a few years.
Starting with a small line of credit can increase your chances of being approved. Over time, you can increase the amount and get a lower interest rate as you develop a relationship with your lender.
Fees
Some lenders charge a monthly or annual maintenance fee if you don’t use the line of credit. Draw fees may also apply.
Interest begins accruing when you make the first withdrawal. Rates may be as low as 5% or as high as 25% or more, according to The Balance – offering collateral may help lower your interest rate.
If you reserve the line of credit for special purchases or to stock up prior to a busy season, and then pay the balance quickly, you can avoid paying interest while keeping your account active.
What if you don’t qualify?
Whether your business is new or you’re still trying to build cashflow, there are several reasons you may not qualify for a line of credit. You still have options, the next best likely being a term-loan or a merchant cash advance.
“You can then decide if the program that’s available for the current ‘credit risk profile’ could provide value to the business,” Liberty Capital Group said. “Our goal is to place you where you most qualify for the product and use fund accessibility.”
For more information about a business line of credit, visit Liberty Capital Group online, where you can also begin your application.
