How to Know the Perfect Line of Credit for Your Small Business
If you are a small business owner, you should have a clear understanding about the perfect line of credit for your business. In fact, a line of credit would give you the opportunity to draw against a predetermined credit limit as per your requirements. This is an excellent alternative available for a small business owner to consider, instead of obtaining the complete loan amount at one time.
The biggest benefit associated with business credit line is that you will only be asked to make an interest payment for the amount that you draw. As a result, you would not get stuck when you are trying to pay the interest on the entire capital. Most of the business owners, who don’t have an immediate use for capital, prefer to go ahead with this approach due to the convenience associated with it. In fact, they don’t come across the need to make an interest payment on the capital, where they don’t have any immediate use.
Commercial lines of credit can simply be defined as revolving accounts. As a result, you will be able to find plenty of differences in it and in a loan. When you settle the balance of your line of credit, you will be able to increase the amount that you can draw in future. On the other hand, you will be able to get hold of funds when you actually want them. When the credit line is established, it is one of the quickest methods available for you to get hold of capital as well.
The convenience and affordability linked with a small business line of credit have contributed a lot towards its popularity as well. Most of the business owners out there in the world prefer to get hold of it due to the convenience associated with.
Before you obtain a line of credit, you should have a clear understanding about the perfect line of credit for your small business. You are mainly provided with two major options to consider when you go for credit lines for small business. They include going for business lines of credit with banks and moving ahead for business lines of credit through online lenders. It is important to analyze the pros and cons of these two options and go for the best one out of them based on your preferences.
Business lines of credit with banks
Even though most of the small businesses find it as a difficult task to obtain business lines of credit with banks, they prefer to go ahead with it because of the benefits that they can experience in the long run.
In order to qualify, you should meet some criteria. They include:
- Having a credit score of over 680.
- Average monthly reviews exceeding $10,000.
- More than two years of experience in the business.
- Profitability of the business.
- Ability to pledge hard assets or short term assets.
- No tax liens, foreclosures or recent bankruptcies.
The traditional banks tend to offer credit lines that have a limit in between $10,000 and $100,000. Some of the lenders would have higher limits. However, the highest limits are usually being offered for the best borrowers and they have to be backed up by significant collateral.
Traditional lenders provide the most competitive interest rates for the people. It would range somewhere in between 5% and 13%. However, you will have to meet some of the toughest requirements in order to get hold of the best interest rates. For example, you should maintain high credit scores, annual revenues and should be there in the business for a long period of time.
The banks tend to offer larger lines of credits with lower rates of interest mainly due to the LOCs. It would be secured by the collateral. Banks don’t prefer to take the second position in collateral. Usually, the bank would ask you to refinance any of your outstanding loans in order to go for a new loan.
Last but not least, you need to have a basic understanding of the application process of banks as well. If you go to a traditional lender, you will have to experience a lengthy application process. You might even be asked to wait for several weeks. In addition, you will need to visit several banks. Moreover, getting into a business line of credit along with a bank can be limiting in certain ways. If there is a possibility for you to work with multiple financing partners, you would not like this.
Business lines of credit with online lenders
Since obtaining business lines of credit with banks is somewhat a difficult process, most of the individuals prefer to move ahead with online lenders. Here are the requirements that you should satisfy in order to obtain business lines of credit via online lenders.
- More than six months of existence in business.
- Having a credit score of over 500
- Average monthly revenue of over $2,500
- No recent tax liens, foreclosures or bankruptcies
- Pledge short term assets
The online lenders usually have a higher frequency repayment schedule and a lower limit. However, this would change when the online lender becomes familiar with you along with time. The interest rate would be much higher with online lenders and it would sometimes go up to 20% and 40%. This would be similar to what you pay when you have a small business credit card. The lenders would not ask for specific collateral for a line of credit. The application process is relatively simple as well and the LOCs would be offered much faster. The stronger borrowers will be able to get cash deposited almost instantly.
As you can see, there is a significant difference in between the online lenders and traditional lenders. It is entirely up to you to go for the perfect option out of these two when you are trying to obtain the line of credit for your small business. It should be based on the specific requirements that you have in your mind.
My name is Sherrie Campbell, I am an author, Ph.D. holder, living in California USA. I'm a blogger for the Huffington Post, a weekly contributor for Entrepreneur and licensed Psychologist with over nineteen years of clinical training and experienceRead Full Bio