As a business owner, you know that it’s difficult, if not impossible, to have enough money for every new project you take on or for all the growth opportunities that may arise. Even if you do have enough money on hand, you may face financial risk if you spend everything you have saved to cover these costs. With all the effort you put into starting your business and keeping it running, this risk isn’t really worth it. What can you do when these expenses arise, then?
Your first thought might be to take out a loan or use a business credit card. What if neither of these options seems to work for what you need to pay for, though? The former can be restrictive in terms of what you can use it for, and the latter might not have a high enough credit limit to cover those major costs that arise. You have another option, called a business line of credit. It is another way to borrow funds and pay them back a little bit at a time. It also doesn’t have the same restrictions as a loan and tends to have a higher credit limit than credit cards. Let’s take a closer look at what it is.
A business line of credit is a funding option in which a lender gives you a set credit limit you can spend up to. You can use part or all of this credit whenever you need it within the draw period and on almost anything you might need to pay for. The lender will decide what your limit is, what your interest rate will be, and your repayment schedule. However, you can work with your lender to adjust your limit or repayment plan as needed. You only have to pay interest on the amount of money you actually spend. The flexibility of this funding option makes it more appealing than loans or credit cards to business owners. There are a few categories of lines of credit: revolving vs non-revolving and secured vs unsecured. A revolving business line of credit, also known as an open-end credit account, means that once you pay back the amount you owe, you can use up to your set limit again. For example, let’s say a lender like Backd gives you a credit limit of $15,000. You only use $10,000 of it before you pay that amount off. You then have $15,000 in credit that you can use again. That’s not to say that you have to pay back the total amount used before you can use your funds again. If you use $10,000, you can spend the remaining $5,000 at a later date. The only restriction is that you cannot spend over $15,000 using your business line of credit. Non-revolving lines of credit have the same flexibility as revolving lines of credit with one exception: your funds don’t replenish once you pay them back. If you are allowed $15,000 to spend, you cannot use more than that even if you only use part of that credit amount and then pay it back right away. If you use $10,000 and repay that amount, you still only have $5,000 left to use.
As far as secured vs unsecured lines of credit are concerned, the main difference is whether you need collateral for it. Secured lines do require collateral whereas unsecured lines do not. Unsecured lines of credit are much more common than secured lines of credit are. With that being said, unsecured lines can have higher interest rates and can prove more difficult to get.
To get a better understanding of what a business line of credit is, it helps to look at how it differs from loans and from credit cards.
When looking at a business line of credit vs a loan, there are a few key differences: how each is used, what each is used for, how each accrues interest, and the other costs that come with each.
How They’re Used: While you can use any or all of your business line of credit whenever you want, a loan requires that you use the entire lump sum at once. You also don’t have a revolving option with a loan, meaning you don’t get to use the amount of the loan again once you pay it off. Instead, you would have to take out a new loan.
What They’re Used For: Once a lender has approved and given you a business line of credit, you can use it however you want. With a loan, on the other hand, you have to use it for what you specified when you applied. For example, if you take out loans for delivery trucks, the money that the lenders award you must be used for delivery trucks only. You cannot use any amount you have remaining on inventory items or towards paying employee salaries.
How They Accrue Interest: Whenever you receive a business line of credit, you only have to pay interest on the amount you use, not on the whole line of credit awarded to you. The entire amount of a loan, on the other hand, starts accruing interest right away (with some exceptions). With that being said, interest rates on lines of credit tend to be higher than those on loans.
Other Costs: When you pay off a loan, you may have to pay a closing cost, which is a processing fee that comes with closing out your loan. Closing costs tend to be higher on loans than on lines of credit.
Ultimately, if you want to make a one-time purchase, taking out a loan is a better option. For bigger projects or recurring expenses, a business line of credit works better.
The differences between a business line of credit vs a credit card are based on the fact that all credit cards are lines of credit but not all lines of credit are credit cards. Just like the comparison between one specific type of apple and apples overall, the rules and uses of credit cards are more specific than lines of credit. The key differences that arise when comparing the two relate to how each is used, what each is used for, interest rates, and what comes with each.
How They’re Used: If you have major expenses or projects coming up and don’t know exactly how much they’ll end up costing, it is better to use other lines of credit. Essentially, lines of credit in general ensure that you can maintain your working capital when these projects arise. Credit cards, on the other hand, work better for day-to-day expenses or low-cost expenses, such as office supplies or gifts during an employee appreciation week.
What They’re Used For: If you don’t need cash for an expense, a credit card can be easier to use than other lines of credit. If you do need to pay with cash, though, other lines of credit work better than credit cards. If you do use a credit card for a cash advance, you may have to pay some high fees.
Interest Rates: Credit cards tend to have higher interest rates than other lines of credit.
What They Come With: Credit cards often offer reward programs or whereas other lines of credit do not.
So if you’re wondering, Can a business line of credit be used like a credit card?, the answer is that it depends on the line of credit. If you have a credit card, then yes. Other lines of credit do not necessarily work the same way. Despite their differences, though, there are also several similarities between credit cards and other lines of credit. For example, both offer secured and unsecured options. Also, credit cards, like other lines of credit, allow you to spend up to a certain amount when you want and on what you want.
There are five main lines of credit types: personal, business, home equity, securities-backed, and demand.
Personal Line of Credit: Like the name suggests, you use personal lines of credit for personal reasons such as weddings, emergencies, travel expenses, etc. To get a personal line of credit, you have to prove that you have a good credit score (usually 670 or above), have a reliable income and that you have paid back (or are in the process of paying back) all other loans you have taken out.
Business Line of Credit: This line of credit type is best for running your business. The lender you receive your line of credit from will base your credit line amount on your business’s market value and profitability as well as the risks you’ve taken during your business’s financial history. Backd offers this line of credit, usually with interest at a variable rate (meaning it will change as market conditions change). It is specifically useful for covering short-term needs.
Home Equity Line of Credit (HELOC): The amount you receive for this line of credit is based on your home’s equity (how much your home is worth minus how much you have left on your mortgage). You will typically be allowed to borrow 75-80% of the equity amount. Although you can use this line of credit to pay for expenses related to your home, such as home improvements, you do not necessarily have to use it on your home. For home equity lines of credit, you typically have a draw period of 10 years when you can spend the money however you want and a repayment period of 10-20 years. Your house is used as collateral for this line of credit.
Securities-Backed Line of Credit (SBLOC): This line of credit lets you borrow 50-95% of the amount of money you have in securities (certificates that are worth money and can be traded) so that you don’t have to liquidate those assets. Those securities are used as collateral for this line of credit. You cannot use securities-backed lines of credit to purchase or trade more securities.
Demand Credit: This is a line of credit rarely offered by lenders. It lets you borrow however much you need whenever you need it (on demand). The catch is that the lender can request repayment whenever they want. Before they do, the payback period (the period when you make payments but do not have to pay the full amount yet) may require that you either pay back interest only or both interest and capital.
No matter which type of line of credit you are interested in, you will have to follow the same steps to get that funding.
Just like with any big financial decision, you should take the following steps to get a line of credit:
Determine how much money you need. If you’re doing a project or renovations that you’re borrowing the money for, add up the price of materials and supplies. If you want to cover your payroll for a bit, make sure to know the salaries of the employees you will pay using the credit. If you need more inventory, calculate how much the inventory items will cost altogether. Whatever the case may be, having the right numbers will ensure that you have enough money to cover costs but not so much that you are tempted to spend money on more than you need to.
Make sure you meet the line of credit requirements. Once you have a few lenders in mind, you can look at some of the common ones. For example, Backd looks at:
Your credit score
Your business’s location
Your business’s revenue
How long your business has been operating
Find a lender. Banks, credit unions, and online lenders all offer lines of credit. Do your research into each lender you are considering before choosing one. Look into their line of credit rates, interest rates, eligibility requirements, and payback period options to find the best fit for you. Backd will give you the best rates for your business so that you don’t have to worry about finding extra funding elsewhere or cutting costs just to make ends meet.
Gather your materials. Finding everything you need before you work on your application will make applying much easier. The lender can tell you exactly what documents to provide with your application. Some of these items you might need include:
Tax returns (both personal and for your business)
Submit the application. If the lender approves your application (which can take anywhere from minutes to weeks), they will send you a loan agreement so that you know exactly how much you will get, how long you have to use that line of credit, and details about repayment.
The application, usage, and repayment processes can be pretty simple. If you choose Backd as your lender, you can expect it to look like this:
Apply online. All you need for your application is basic information about your business. It will take 3 minutes or less to complete. Once you submit your application, Backd will inform you of their decision within 24 hours.
Draw funds. Backd has a dashboard that will tell you how much money you have available, how much you’ve used, and what your total line of credit is worth.
Make payments. Your Backd dashboard will let you know how long your repayment plan is. Typically you will have to make payments weekly for 6-12 months depending on the terms of the agreement.
Get more funds. Because Backd offers revolving, unsecured lines of credit, your credit automatically reloads as you pay it back. No need to call Backd to get your funds reloaded.
With such an easy application process, Backd gives you the funds you need while allowing you to keep your focus on what matters: running your business!
How Long Does It Take to Get a Business Line of Credit?
How long it takes to get your business line of credit varies depending on the lender. It can take anywhere from 24 hours to several weeks to get through the application, approval, and funding processes. When you borrow from Backd, the whole process only takes a couple days at most. So if you have something that needs to be funded soon, you don’t have to worry about making ends meet until your funding comes through. To ensure a quicker turnaround time when applying for a line of credit, take the following actions to make your application stronger:
Make sure to complete everything on the application as accurately as possible.
Check both your personal credit report and your business’s credit report to check for any problems that may need to be corrected.
Establish a credit history for your business if you haven’t already done so.
Pay off any debts you can to boost your credit score.
Collect your receivables to increase your business’s revenue.
Increase sales to also boost your business’s revenue.
Reduce unnecessary inventory so that your business spends less money.
Like any form of credit or loans you take out, a line of credit can be a good idea if used wisely. They are not meant for one-time purchases (loans would be better for those), but instead are good for bigger financial projects or recurring costs that might arise. What makes lines of credit stand out, too, is their flexibility. Once you have a line of credit, you can use it whenever and however you want with few restrictions. And because you only have to pay interest on what you use, it is a great option for financing projects that might come in under budget. Does getting a line of credit affect your credit score? Yes, it can. Even applying for a line of credit can impact your credit score since lenders will have to check it. Luckily, Backd does soft credit pulls on your score so that it won’t affect it. Initially, opening a line of credit can lower your credit score since you have a shorter credit history on it. However, if you make payments on time and keep your line of credit open for the time given in the agreement, you can boost your credit score.
If you are wondering, “Can you get a line of credit to start a business?”, then opening a line of credit may not be a good idea for you. With business lines of credit specifically, lenders typically require a business to be opened and operating for some time before you can even qualify for one. If you are looking to start a business, then a loan would be a better option for you.
It is important to note that a line of credit isn’t free money. It does have to be paid back on time, including interest (which is not typically tax deductible). Some lenders also charge you fees if you do not use your line of credit. If you think you’ll actually use your line of credit and be able to pay back what you use in a timely manner, then a line of credit could be a good option for you.
If you’re ready for the flexible funding that comes with using a business line of credit, then turn to Backd. We offer instant access to revolving credit with unlimited terms. That combined with our incredible rates makes our options hard to beat. What credit score is needed to get a line of credit from Backd? You need at least a 600 FICO score. The other business line of credit requirements for eligibility are:
Your business operating for at least a year
Your business making at least $25,000 in monthly revenue
Your business is based in the United States
Meeting these requirements makes you eligible for borrowing amounts between $10,000 and $25,000. If you’re ready for the funding you need to set your business up for success, apply for a business line of credit today.