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Should I Get a Business Loan or Line of Credit?

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Is a business line of credit right for my business.

Every financial decision for your business is important. Especially if you are thinking of taking on financing, it’s essential that you know with some real certainty that you are getting the right product for your needs. Many small business owners likely find themselves stuck between two popular choices, those being business loans and business lines of credit. While both types of financing have their benefits, it’s more than possible that one may suit your needs better than the other. Let’s get into the key differences between a business loan and a line credit.

What is a Business Loan?

A business loan is basically an agreement between a lender and a borrower in which the lender gives a one-time lump sum of money to a borrower. The borrower is then responsible for paying back that lump sum to the lender with interest. What we’re describing here is also called a term loan, a loan that you pay back over a certain term.

Depending on the lender and the merits of a borrower, business loans can be for amounts up to $5 million and be as long term as 25 years. But the important thing to remember when it comes to business loans is that they generally only account for one singular sum of capital. When you pay back a loan, you can of course take out another one. But business loans are almost always one-time, lump sum transactions.

Business Loan Benefits

Business loans come with specific benefits, including:

  • Set Repayments: Business loans usually have a fixed rate, which means fixed monthly payments throughout the life of the loan. This makes it easy to budget for repayments.
  • Relatively Lower Interest Rates: Generally speaking, business loans have a lower interest rate than business lines of credit. However, rates depend entirely on your credit history and financials.
  • More Financing Term Options: Business loans can provide both long- and short-term financing, making them suitable for large investments or smaller expenses..

Business Loan Drawbacks

There are reasons that some business owners choose a business line of credit over a loan. Drawbacks to a business loan include:

  • Collateral Requirement: If you’re applying for a secured business loan, you’ll be required to put up collateral for the loan.
  • Application Process: The application process for business loans can be more complex than other forms of financing, such as lines of credit or credit cards. However, this can vary form lender to lender.
  • Fixed Funding Amount: If you find that you need more funds than you received from the loan, then you’ll need to apply for additional financing.

Business Loan Requirements

When applying for a business loan, there are some almost universal requirements that lenders will need to see before approving you. Let’s get into the most universal of those requirements here.

A Specific Purpose for Your Business Loan: Lenders will want to know what you plan on using your capital for. Business loans, however, don’t have to be used to buy one specific thing. While many people use term loans to secure real estate or other expensive assets for their business, it is more than viable to say that you plan on using your business loan to increase your working capital.

Collateral: Just about all business loans today will require some form of collateral. There are, of course, always exceptions. But it is a good idea to anticipate your lender asking for collateral if you are looking for a business loan. Good examples of collateral include real estate, heavy equipment, or even standing inventory. Basically, collateral can be any business asset of close-to-equivalent value of the loan you are looking for.

Required Documents: Every lender will require some amount of paperwork from a borrower before moving forward on a loan. Having PDF copies of all of these forms before applying will likely save you some time later in the process.

  • Your most recent business bank statements
  • Your most recent tax returns
  • Forms on ownership and affiliation if necessary
  • Proof of your collateral
  • Disclosures of other debt
  • Your driver’s license or other valid state ID
  • Any documents related to a reincorporation or business name change
  • Any business insurance polices you currently hold

Time in Business: The longer your business has been in operation, the better you will look to lenders, generally speaking. It’s not uncommon for lenders to ask for at least two years of operation for business loans.

Business Plan: While not universally required, it’s more than possible that some lenders may expect you to present a business plan that includes (among other things) what you plan on using your business loan for. Your business plan ought to be a comprehensive overview of your current structure and how you plan to grow or change over at least the next five years. The more involved and specific your plan is, the more trustworthy and responsible you are likely to appear to lenders.

What is a Business Line of Credit?

A business line of credit is essentially a supply of capital provided by a lender that you can draw and repay as long as the line stays open. Similar to traditional credit cards, lines of credit have a credit limit, often have monthly billing periods, and borrowers are only responsible for money that isn’t paid back into the credit line before the end of a billing period. But unlike credit cards, which can only be used for transactions that allow card payment, lines of credit are real working capital that businesses can use to cover traditional expenses like payroll or even inventory costs.

Business Line of Credit Benefits

Business owners may prefer to select a business line of credit over a loan due to the following benefits:

  • Flexibility: A business line of credit provides flexibility in accessing funds. You can borrow as much or as little as you need up to your credit limit, making it ideal for businesses that might need additional funds down the road.
  •  Interest Only on What You Use: While a term loan charges interest on the entire loan amount, a business line of credit only charges interest on the amount you draw. This could
  • Different Payment Options: Some business lines of credit let you choose how often you want to repay, whether that be every week or every month. This gives small businesses even more flexibility.

Business Line of Credit Drawbacks

Drawbacks of a business line of credit include:

  • Variable Interest Rates: The interest rates on a business line of credit are often variable, meaning they can fluctuate with market conditions. This variability can make it challenging to predict future repayments.
  • Potential for Overborrowing: When not managed correctly, a business line of credit makes it easy to accidentally borrow more than you’re eligible for. Always keep an eye on the total line of credit and the amount drawn.
  • Collateral Requirements: Just like a term loan, some lenders may require collateral, such as business assets or personal guarantees, to secure a line of credit. This adds a layer of risk, as failure to repay could result in the loss of assets or personal liabilities.

Business Line of Credit Requirements

Every lender has their own requirements and makes agreements on a case by case basis. But when applying for a line of credit, there are some basic things that just about every lender will be looking for. Let’s get into those major requirements here. But it is important to remember, also, that some lenders may require more and there are likely more than a few who could ask for less.

Incorporated Business: While there are certainly some online lenders willing to give lines of credit to sole proprietors, the majority of todays lenders are looking for incorporated (as well as registered) businesses.

Use of Funds: The majority of lenders, especially for larger lines, will be looking for a proposal that lays out your general intentions. Unlike a business plan which explains your overall aspirations and plans for growth, your proposal ought to be solely centered on how you plan on using your line of credit.

Collateral: There are two distinct types of lines of credit, one which requires collateral and one which does not. A secured line of credit is a line of credit that is secured with collateral from the borrower. An unsecured line of credit is a line with no collateral. As you may guess, a line of credit with no collateral represents a higher risk factor for lenders and therefore often comes with a higher interest rate. Further, the majority of larger financial institutions like banks and credit unions who offer lines of credit generally offer secured lines. This means that if you don’t have the sufficient collateral to secure a line, you may want to look into online lender options.

Required Documents: Lines of credit require many of the same documents as a business loan.

  • Your most recent business bank statements
  • Your most recent tax returns
  • Disclosures of other debt
  • Your driver’s license or other valid state ID
  • Forms on ownership and affiliation if necessary
  • Proof of your collateral (If you are seeking a secured line)
  • Your loan proposal
  • Any documents related to a reincorporation or business name change
  • Any business insurance polices you currently hold

Time in Business: It is likely that larger financial institutions will be looking for potential borrowers who have been in operation for at least two to three years. It’s possible to find online lenders asking for less but, as the rule goes, the younger and less proven a business is, the more likely interest rates will go up.

Industry: Unlike many business loans, which are anything but industry specific, some lenders may shy away from certain industries when it comes to lines of credit. The industries that get considered ‘risky’ are decided by the risk departments at each individual lender but here are some of the industries that tend to be classed as high risk and, therefore, may have more trouble securing a line of credit:

  • Restaurants / Food industry
  • Retail
  • Wholesaling
  • New or used car dealers
  • Casinos (excluding hotels)

While this doesn’t represent every high-risk industry, this list represents businesses that are more sensitive to economic cycles, deal mostly in cash, or are subject to a large amount of legal regulation.

Choosing Between a Business Loan vs Line of Credit

Where to Get a Business Loan or Line of Credit

There are three major ways to connect your business with a loan or a line of credit. Let’s explore them each, one by one, to better understand what makes one a better match for a business compared to another.

Banks

With some exceptions, securing a line of credit or a loan with a major bank requires the most paperwork. On top of that, banks often have the highest requirements for credit scores as well as revenue and time in business. What you get in exchange for those higher requirements, however, are more generous term and interest rates.

Online Lenders

Online lenders represent the quick and flexible alternative to the traditional bank option. Online lenders have grown in popularity over the past generation and become a lifeline for younger businesses thanks to both their generally more lenient requirements as well as the speed in which lines can be opened and loans can be distributed. What you get in exchange for that speed and lower scrutiny is, of course, more cautious interest rates and terms.

Community Development Financial Institutions

Community Development Financial Institutions (CDFI) are groups that specifically serve under-resourced communities. If you are a business owner in a rural area or are a member of a special interest group, there is a good chance that there is a CDFI who may be interested in working with you.

Choosing the Right Financing for Your Business

While business loans and lines of credit both provide working capital for your business, the way you access that capital is completely different. Business loans are usually a good match for large one-time purchases like real estate. Since your capital is coming in as one lump sum, it generally makes the most sense to spend it in the same way. A line of credit, however, is a longer-term relationship between a lender and borrower. It is more than possible for a line of credit to stay open for a couple of years.

A line of credit, then, should be used for predictable and repeatable expenses that you are certain you can pay back before the end of a billing period so you can avoid interest. Businesses who handle lots of invoices or who only see payouts once or twice a month are the most likely to benefit from the type of working capital that a line of credit can supply.

 

Wil Rivera

Wil Rivera

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What is a Business Line of Credit?

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Line of credit for small business

Running a small business means being flexible and adapting to change faster than the competition. Every small business owner knows the value of cash flow but are you taking full advantage of what credit, or more specifically, a business line of credit can do for you and your team? Let’s talk through the key points of what a business line of credit is and what you can expect after opening one for your business.

How Does a Business Line of Credit Work?

A business line of credit for small business is functionally an amount of money that you can spend, repay, and redraw for the length of your agreement with whatever financial institution you opened the line with. As you spend money in your line of credit, that money counts against your overall line limit. As you repay that money, you can then spend it again as long as your line stays open.

The small business that opens a line of credit is only responsible for paying interest on the balance that remains at the end of a billing period. So, this means that if you fully pay off your business line of credit before the end of each billing period (generally monthly), you will not pay interest on your line.

Where to Get a Business Line of Credit

Business lines of credit are available from a wide range of financial institutions ranging from larger national banks all the way to small online lenders. Let’s talk about the difference between what you can expect from a line of credit at a larger institution versus an online lender.

  • Banks and Major Financial Institutions: If you are looking to open a business line of credit with a bank or credit union, you can expect generally steep requirements for your credit history, business credit score, your annual revenue, and your overall business history. Many major institutions will also ask for some kind of collateral when opening your line. If an institution requires collateral, it means they are offering secured lines of credit, but we’ll get into that later.
  • Online Lenders: There is an almost uncountable number of online lenders active today, so it is impossible to speak for all of them, but you can expect some lighter credit requirements and maybe even opportunities for start-ups, something almost impossible to find at major banks. Of course, in exchange for a higher risk line, your interest rate will likely be higher to account for it. It is also likely that most online lenders offer a quicker application process compared to major institutions.

How to Get a Business Line of Credit

While every business ought to have their own process, here are our four recommendations for connecting your business with a line of credit in a smart and comprehensive way.

1. Decide How You Will Use Your Business Line of Credit

While it’s true that a business line of credit won’t accrue interest when it goes unused, that doesn’t mean that your business should open one simply to have one. Think about the potential situations where you may use your line. For example, would your line of credit ever be used to cover payroll?

Or maybe for inventory? Or do you want to use your line for emergencies and unexpected expenses only? No matter what your answer is, your next step is to determine the most money that you could ever require for any of those use cases. The figure you come up with likely represents the credit limit you should look for in your line of credit.

2. Review Your Current Financial Portrait

Just about every lender is going to want to get a good picture of your recent financial history as well as your business credit score. It is possible lenders may want to see your personal credit as well if you are a newer business owner or your business credit isn’t developed enough.

Your first step should be to make PDF copies of at least the last six months of your business bank statements, and a copy of your ID is helpful to have on hand as well.

3. Compare Lenders

Feel free to talk with multiple lenders and collect as much information as you think you’ll need before making your first inquiries. It doesn’t hurt to find lenders who have already funded your industry or have made strides for causes you already believe in. Choosing your lender ought to be just as involved as choosing your final offer.

4. Get Your Documents in Form and Start Applying

This is the easy part. Many online applications today are straightforward and meant to save business owners like you time.

Business Line of Credit Application Requirements

Business line of credit application requirements vary by business, but most lenders will require the following:

  • Business information, including type of business and ownership.
  • Financial statements to demonstrate proof of revenue and cash flow.
  • Credit history, both personal and business credit.
  • Proof of time in business.
  • A business plan to demonstrate the intended use of funds.
  • Collateral, if you’re applying for a secured business line of credit.

What is a Business Line of Credit Used For?

While some business owners like to use their business line of credit in predictable and repeatable ways like covering payroll or inventory, there are several others who keep their line of credit clear in the case of an emergency. Since a line of credit is a re-drawable sum, any expense you expect to repeat itself may be a good fit for your line of credit as long as you are certain you can pay back the full amount before the end of the billing period. If not, you will have to pay interest on the unpaid amount.

Secured Versus Unsecured Line of Credit

A secured line of credit is a line of credit backed with some amount of collateral. This can be real estate or any asset of value that you declare would be forfeited in the event your line of credit went unpaid. An unsecured line, then, is a line of credit tied to collateral. As you may guess, secured lines of credit generally have more generous interest rates and terms while unsecured lines (because they present more risk to a lender) tend to have high interest rates. Repayment terms on an unsecured business line are also likely to be considerably less lenient, as there is much more risk on the lender’s side.

Business Line of Credit Versus a Business Credit Card

The biggest difference between a business line of credit and a business credit card is how you can use the two products. While business credit cards can be used in just about every transaction that allowscard  payment, lines of credit are considerably more flexible, as they represent an amount of capital provided on behalf of a lender. It’s just about impossible to pay an invoice or payroll, for example, with a business credit card, but this is more than possible with a line of credit.

Another key difference between business lines of credit and business credit cards is that lines of credit generally have higher draw limits than business credit cards. A business line of credit amount is generally chosen based on larger and not short-term expenses like payroll or restocking inventory. A business credit card, while still likely to have a limit higher than a personal card, often isn’t suited for the same expenses that a line of credit can handle.

What to Consider Before Getting a Business Line of Credit

While a business line of credit may seem like the ideal option for your business, it can depend on the specifics of the line of credit offered. Consider rates, terms, and alternative options before taking out a line of credit.

Rates and Terms

Each lenders will offer different rates and terms for a business line of credit. While comparing lenders, pay attention to the rates and terms available to your business. It’s also worth looking at repayment terms at this time.

Line of Credit Alternatives

Aside from a line of credit, small businesses have other financing options available, including:

  • Term loans: Term loans come with a fixed loan amount, rate, and repayment schedule. The fixed aspects of a term loan make it an attractive option for business owners who want a lump sum loan with a consistent repayment schedule.
  • SBA loans: Supported by the U.S. Small Business Administration, SBA loans are guaranteed by the SBA but facilitated through a lending partner, such as a bank, credit union, or online lender. The SBA has multiple loan programs to choose from.
  • Equipment financing: Equipment financing lets a business take out a secured loan to purchase equipment. When the loan is paid off, the equipment become fully owned by the business.
  • Revenue-based financing: With revenue-based financing, small businesses can secure financing in return for a percentage of business revenue, up until the predetermined repayment amount is reached.

Business Line of Credit FAQs

Even with a good grasp of the basics of a line of credit, it is more than understandable to still have some questions. These are the most common questions when it comes to business lines of credit.

How Do You Pay Back a Business Line of Credit?

In most cases, it is possible to pay back your business line of credit in the same way you would pay back any loan or lump sum financing with a lender. While lender methods will vary, it is more than likely that lenders will give you a specific online portal for repayment.

How Do I Request a Line Increase?

It is more than likely that most lenders will determine your eligibility for a line increase in the same way that they will assess your ability to take on more financing in general. With that in mind, you may want to get in contact with your lender’s renewal department.

When deciding whether your business needs a line increase, it is important to think about both the maximum amount of money that you may need to draw in a billing period. But an equally important consideration is the highest amount of interest you are able to take on. Do some thought experiments

and talk with your lender to better understand the maximum line size that could work for your business.

Does a Business Line of Credit Help Build Business Credit?

Responsibly and consistently repaying your line of credit at the end of each billing period is a proven way to show credit responsibility. While there is no way to know for sure how much keeping good standing with your line will help your overall credit score, you’re certainly not hurting your score by doing so.

Can an LLC Open a Business Line of Credit?

Yes, LLCs can open a business line of credit as long as they meet eligibility requirements. To qualify, LLCs should make sure they have a business plan, bank statements, proof of revenue, and both business and personal credit scores ready.

Wil Rivera

Wil Rivera

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How to Use a Business Loan to Hire Employees

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Needing new employees because your business is growing is a great spot to be

One of the most exciting times for any small business is when it has the opportunity to grow – be it from better-than-expected sales; the development of a new product or service; or physical expansion such as getting a bigger space or a second location. Business growth, however, usually requires the hiring of additional staff, which can be expensive. 

Fortunately, small business owners have a wide array of financing options that can help them expand their staff and facilitate their growth plans. Depending on your credit score and the strength of your business plan, a small business loan, a business line of credit, or even an SBA loan can help you hire the team that you need to meet your growth expectations. 

Types of Financing

If you’re looking to take your small business to the next level and need to hire additional employees, several types of financing options could be right for you depending on your specific situation. 

SBA 7(a) loans

SBA 7(a) loans are perhaps the best financing option when it comes to growing your business and hiring new employees because they generally offer the lowest interest rates and are flexible when it comes to the duration of the loan. Take note, though, that the SBA does not directly administer the loans, rather, they guarantee a large portion of loans given by qualified lenders. 

Keep in Mind: These loans require an excellent credit score, a strong business plan, and an excellent cash flow history. They can also take weeks to fund once you’ve been approved, so if you are planning to apply for an SBA 7(a) loan, make sure you have the qualifications beforehand and that you’re not in a hurry to receive the funds. 

Traditional loans

Traditional loans, or term loans, are similar to SBA 7(a) loans but they aren’t guaranteed by the SBA. They are offered by both traditional banks and alternative lenders, and like the 7(a) loan, they offer a lump sum of cash upfront to be paid back over a predetermined time frame and a pre-agreed upon interest rate. 

Keep in Mind: Traditional banks may require a business plan, especially if you’re borrowing for long-term growth, as well as excellent credit, and will charge an interest rate that is generally higher than a SBA 7(a) loan. An alternative lender won’t require a business plan and may grant you a loan with a lesser credit score than a bank, but if approved, will charge a higher cost of capital. 

Business line of credit

A business line of credit is, perhaps, the most flexible financing tool for small business owners seeking to hire new employees as part of their growth plan. A line of credit gives you quick access to cash that can be used to hire new employees as your growth plan progresses – and you’re only charged interest on the amount you borrow. 

Keep in Mind:  A business line of credit may charge a higher interest rate than a bank loan, and payback and renewal terms can be complicated, so really examine the terms of the line of credit before you sign up for one. You may be able to get a higher line of credit and a lower interest rate with a traditional bank if you secure your line of credit with collateral. 

Short-term Loans 

Short-term loans, also known as working capital loans, are typically loans with a 6-month duration or less. These types of loans can help you quickly hire new employees as you grow. They are almost exclusively offered by alternative lenders, so the requirements for these loans are usually not as strict as for a bank loan. 

Keep in Mind: Short-term loans often charge a higher interest rate than your standard bank loan. Additionally, if you believe a short-term loan is best for you,  carefully research the lender, as there are some bad actors in the online lending space.

Define Your Needs Beforehand!

If you’re seeking to expand your business by hiring new employees, there are several types of lending products for you to consider. But, before you begin evaluating your different options,  it’s important that you carefully define what your needs are. Doing so beforehand can help you determine factors such as the loan amount you are seeking, whether a traditional bank or online lender is best for you, and the type of financing you need. 

The factors you need to define before you delve into the lending market are:

  • How many new employees do you need to hire and what will they cost? This seems straightforward, but keep in mind that you shouldn’t just consider what you’re going to pay them, you also need to factor in payroll taxes, whether they will be full-time, part-time, or contracted workers, and any benefits you may want to offer them. This should help you determine how much you need to borrow. 
  • Do you have a strong growth plan? In other words, can you make a strong case that your growth plan will succeed with the addition of new employees? If you plan to apply for a business term loan with a traditional bank or go to an SBA lender for a SBA 7(a) loan, they are going to want to see a convincing business plan that demonstrates how you plan to grow your business and that you’re going to make money to cover the cost of your loan. 
  • What is your credit score? The strength of your credit will be a determining factor in the cost of capital for your loan. Put simply, the higher your score, the lower the interest rate you’re going to have to pay, no matter what type of financing you’re seeking. Check your credit score with all three credit bureaus (Experian, Transunion, and Equifax), as well as your business score with Dun & Bradstreet. If it’s low, examine ways you can improve it, or determine if you have collateral in case a lender will only offer you a secured loan or line of credit. 
  • How strong is your cash flow? If you’re seeking to hire temporary seasonal workers, that means your business probably has an uneven cash flow. If you decide to take out financing to pay for seasonal workers, make sure that your cash flow is strong enough during your busy season to justify taking on that debt. 
  • What type of business do you own? The type of business you operate is important because some types of small businesses are considered riskier than others. Restaurants, transportation companies, and real estate brokerages are generally considered among the riskiest industries, and if your business fits in one of these industries, you may have trouble securing a loan with a reasonable interest rate. If you are in any of these industries, it’s especially important to make sure you have an excellent business plan, a strong cash flow and that you can demonstrate future success with your growth plan. 

A great small business starts with great planning. Defining your needs before you look to financing will help you select the best financing option as well as keep your cash flow strong while you grow your team. 

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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Best Sources for Short-term Finance (Updated For 2024)

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cash loan short-term financing

KEY TAKEAWAYS

  • Short-term financing options like short-term loans and merchant cash advances can offer small business owners fast remedies for addressing cash flow challenges, all while providing flexible repayment terms.
  • Accounts receivable financing and business lines of credit offer access to capital based on invoices or credit limits, allowing businesses to manage working capital effectively.
  • Trade credit, inventory financing, business credit cards, and peer-to-peer financing can be good alternative sources of short-term finance that cater to specific needs, from delaying supplier payments to securing inventory and accessing peer-based loans.

Every small business owner deals with capital and cash flow management, which can include capital shortages. Whatever the reason for a shortage may be, it’s the owner’s job to find ways to infuse additional capital into their business when one occurs. Short-term financing can be a viable solution in such instances.

The good news is, there are many forms of short-term funding available for consideration. In this article, we’ll highlight some of the best sources of short term financing available to help you grow your business.  So, if you need short-term business financing to improve cash flow or for another reason, consider these options.

Short-Term Loans

As its name suggests, this type of business loan matures after a short term, usually within a few months. While these loans typically come with fixed interest rates, there are some lenders that offer variable interest as well.

Short term loans are best used to address immediate cash flow needs, and they can be very beneficial for different businesses under the right circumstance. For example, you lack the cash to pay your employees’ salaries because your business is dealing with the tail-end of your slow season. These short term business loans can fill the gap until business picks back up.

Because of their short maturity periods, a short term loan is typically granted with lower borrowing caps than you would see with financing that has a longer maturity period.  Still, the overall cost of financing is often lower than a long term loan.

Merchant Cash Advance

If your business has not built a credit history yet, you may still qualify for a merchant cash advance, Unlike traditional loans, merchant cash advances offer a flexible financing solution based on your sales, not fixed rates. Instead, a financing company purchases a business’ future sales as a discounted rate.  Payback occurs as you make sales or your accounts receivables are paid during your normal course of business, with a percentage of that incoming revenue.

There are a number of perks to taking out a merchant cash advance. One is the fact that you, the borrower, can negotiate the rates. You also don’t typically need collateral to secure the loan, but personal guarantees are required, and approval times are generally faster than a traditional term loan.

On the flip side, merchant cash advances subject borrowers to higher interest rates than traditional loans due to the uncertainty involved with sales.

Accounts Receivable Financing

Accounts receivable financing, also known as invoice factoring, allows borrowers to leverage their outstanding invoices for immediate capital.  Unlock immediate capital with accounts receivable financing by leveraging the value of your outstanding invoices. Lenders can give you up to 90% of the total invoice value upfront, and you’ll receive the rest (minus a factor fee) once your customers pay their dues. You can receive the money within a matter of days, and stellar credit isn’t required On your end. Instead, terms are based on your customer’s creditworthiness.   As such, invoice Factoring is an ideal financial product if your business has several outstanding invoices with well-established businesses.

Accounts receivable loans can be repaid in two ways. The first is structured where you pay back the amount borrowed after you’ve collected payment for your invoices, plus the interest you and the lender agreed upon when you were approved for the loan.

The second option is to sell your invoices to the lender at a pre-determined rate. Instead of repaying the loan, you’re actually shifting the burden of collecting and settling the amounts due from your customers to the loan company.

Be sure that you understand the terms of your agreement and consider the factor fees and other rates. This way, you know how much this short-term funding will cost your business in the long run.

Business Line of Credit

A business credit line grants you access to a set amount of credit that you can borrow from as needed. Instead of providing you with a lump-sum loan, a business credit line allows you to select however much cash you need, within your limit, at any given time. The rest of your credit remains available, for the term of your agreement, for you to borrow when the need arises again.

This alternative to traditional business loans is advantageous because you’re not limited by preset loan amounts. For example, if you only need $5,000 and have a credit line worth $10,000, you can borrow what you need and still have $5,000 to draw from when cash flow requires it again. The only downside is that lines of credit generally run-on variable rates. Therefore, interest on the loan can fluctuate.  However, a credit line gives you the flexibility to take money as needed; it also gives you more freedom in using that money vs. a business credit card which limits your.

Trade Credit

Trade credit is essentially a “buy now, pay later” agreement between a vendor and their supplier. Through this type of short-term financing, you can buy much-needed inventory from your supplier that you can pay for at a later date. This eliminates the need to have cash on hand to pay the supplier upon delivery.

While it does not provide you with cash, the trade credit arrangement still helps to improve cash flow by providing you with inventory that you can sell off and earn revenues from. If you have a good working relationship with your vendors, you can expect very low or even no interest at all!

Trade credits are beneficial if you’re expecting huge sales of a specific product or product line. For example, if you need inventory for a Black Friday sale and don’t have the cash, you can arrange for credits with your suppliers instead.

Another perk to using trade credit for short-term financing is that these transactions can improve your business credit.

Inventory Financing

Inventory financing is another ideal short-term financing avenue that product-based small businesses might consider. This type of financing offers working capital to purchase inventory. The inventory serves as collateral for the loan. It is a secured loan, but you don’t need to pledge any business assets to the lender. Instead, the inventory that you’ll be purchasing serves as collateral.

Just like trade credits, inventory financing is a great option when you’re expecting a huge inventory movement like seasonal sales, but your supplies have already run low and you have no capital available. Just make sure you pay off the loan once you’ve sold off the inventory you pledged for it, or else the lender will seize your supplies upon default.

Business Credit Cards

Like their consumer counterparts, business credit cards can provide purchasing power even when your cash flow is tied up. You use credits assigned to your card to make purchases and then pay them off when the due date arrives. Paying off the credits makes them available once again for use.

Business credit cards are generally more advantageous because they provide you with flexibility in repaying the credit. Depending on the type of card you apply for, you can also earn various rewards that can be put towards your business needs. Plus, it’s easier to apply for a business credit card than for a business loan.

Peer to Peer Financing

Peer-to-peer financing generally involves individual investors that act as lenders. Instead of a financial institution, these people are found on P2P platforms where they offer businesses or individuals the opportunity to apply for loans from them.

Just like traditional loans, the borrower and the lenders agree to a loan with fixed interest rates. The transaction is made between the two parties directly. The only “middleman” involved is the platform.

The more personal nature of the negotiations also improves the borrower’s chances of being approved instead of trying to borrow from a financial institution. The interest rates may also be more favorable.

While it gives borrowers direct access to funds, peer-to-peer financing also complicates the process. This is because not all lenders will want to finance the amount needed. For example, if you’re seeking a loan of $20,000, one lender may agree to let you borrow $1,000, another will extend you $5,000, and so on and so forth. This means multiple negotiations and, as a result, multiple loan agreements with varying dates and interest rates.

It’s good to know what options for short-term financing are available for your business when you’re in a pinch. This knowledge saves you from a lot of stress and headaches from wondering where you can get quick financial aid.

Simon Dreyfuss

Simon Dreyfuss

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7 Benefits to Taking Out a Business Line of Credit

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corporate loans to suit your business situation

No matter its size, no business is recession-proof. And this goes double for small businesses. And with the increasing number of concerns about a future recession, it’s more than fair for small business owners to be looking into ways to financially insulate their businesses. 

One of the best ways to protect your business is to increase your financial options. And one of the financial options small business owners ought to consider is a business line of credit. While a lump sum you’d get with a business loan is helpful and definitely has its place, a business line of credit offers more flexibility and doesn’t force you to start repaying upon access to the funds. 

With lenders traditionally tightening their underwriting requirements in a recession, now is the time to consider the benefits of a business line of credit. 

Key Takeaways

  • Stabilize your cash flow with a business line of credit
  • Cover payroll if you experience an economic downturn
  • Gain a reliable supply of working capital
  • Pursue recession-based investments and opportunities
  • Taking out a line of credit benefits forward-thinking businesses

Benefits of Opening a Business Line of Credit in 2023

Odds are, the US economy is nearing a recessionary environment, with economists predicting a 70% chance of a recession this year. Opening a business line of credit gives your business a credit-based cushion. That credit can help you take advantage of new opportunities or simply take the pressure off your current expenses. 

Let’s examine why several business owners are considering the benefits of a business line of credit this year. 

1. Flexible Access to Business Funds

Recessions can hit hard and fast, and with that drop comes a drop in consumer spending. A recessionary environment doesn’t just drop your access to customers either; it can also make materials and even general inventory harder to get ahold of.

A drop in working capital and a lack of cash flow is the perfect recipe for a business closing its doors. Having access to a line of credit gives business owners the chance to weather the impacts of slow seasons or outright recessions. 

2. Only Pay Back What You Withdraw

A line of credit benefits the business owner that doesn’t have a clear borrowing timeline. As a form of revolving credit, lines of credit only require you to repay what you borrow from or draw on the line.

 As long as you stay within your credit line’s limit, you can continually draw on and repay until the line expires. 

3. Improve Cash Flow

Decreased cash flow is one of the biggest threats to your business. And that threat gets even more menacing during a recession. On that, a study found that approximately 82% of small businesses fail because they need more capital to cover payroll, materials, and outstanding supplier invoices. 

While not every business weathers a recession in the same way, businesses with already thin margins are at the highest risk when the economy takes a downturn. According to CNBC, these are the five industries historically affected the most by recessions: 

  • Construction
  • Travel
  • Manufacturing
  • Hospitality
  • Real estate

Industries that have high upfront investment and pay in sometimes have equally high margins – eventually. In an example like this, businesses may spend their first years building up a customer base and recognition while making a minimal profit. Once their initial investments pay off, (be it machinery, a facility, or even an aggressive marketing campaign) businesses like these can see much bigger profits. But this can only come to pass if a business is financially strong enough to make it through their opening years. A business line of credit can be a great tool for a company already in their journey to increase their financial options while making a bigger investment in their business.

 Businesses with a lower profit margin can use a line of credit to help get them through slower seasons or while they are waiting on payment from customers. 

4. Cover Unexpected Expenses

Recessions put pressure on every branch of your business. And that pressure can lead to the weakest branch snapping. In business terms, recessions force small businesses to perform in less than stellar conditions. You may be forced to spend more on materials you depend on or find yourself paying more for utilities. 

These unexpected business expenses can leave you unable to invest in other areas of your business or prop up the battered arms of your organization. 

Taking out a business line of credit adds a cash flow barrier to a business’s bottom line – meaning that unexpected expenses can now have a place in your budget.

5. Build Your Business Credit

Using a business line of credit responsibly and within your means is also a great way to potentially build up your business credit. Habitually drawing manageable amounts of your line of credit and paying them back on a timely basis can only be a good thing for your business.

6. Protection Against Revenue Dips

During the 2008 recession, the US GDP fell by 4.3%. Prices and expectations for supplies changed overnight and proved no business can be too prepared. We’ve seen similar supply issues over the past few years as a result of the pandemic and inflation.  Having a line of credit is like having a first line of defense against downturns or increased prices. While you can’t depend on a line of credit solely, businesses with access to viable credit are often the most likely to weather downturns or outright recessions where cash flow cuts fast.

7. Help Meet Payroll in Slower Months

In slower seasons, recessions, or even with day-to-day operations like a large inventory purchase, it’s possible to use a business line of credit to cover operational expenses, like payroll. While this, once again, can’t act as a permanent solution, a business line of credit gives businesses the flexibility to test out new ventures or as a means to hold on during slower seasons. 

If you’re expecting slower months ahead in 2023, take out a line of credit now as an additional layer of protection. 

How Can a Line of Credit Help Your Business Expand?

Rising inflation, increasing interest rates, and a looming recession don’t affect all businesses equally. Where some businesses may be forced to hunker down for the length of a downturn, there are other businesses that may be able to expand during a recessionary environment.

 Here are some ideas for how a line of credit can lead to new opportunities: 

  • Invest in New Inventory – It’s not just small businesses that face price fluctuations during a recession. Suppliers see it too. Pay close attention to your supply lines. While some suppliers will certainly raise prices, others looking to increase cash flow could do just the opposite. A business with a good line of credit could then take advantage of the timing and increase its inventory.
  • Expand Your Marketing – While many businesses may choose to lower marketing costs during a recession, this just means that your business can take up a more competitive edge. Invest in your marketing during a recession to potentially increase your overall reach and find new customer bases.

Opting for a line of credit is both an offensive and a defensive measure for small business owners. Not all lines of credit are the same, so ensure you choose a lender that you can trust. At Kapitus, we specialize in getting ambitious business owners lines of credit (along with a number of other financing options) with strong track records of success.

Get ahead of the competition and take advantage of the multitude of benefits that could come with a business line of credit. To secure the financial future of your business, apply now for your line of credit.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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What is the Difference Between a Business Line of Credit and a Business Credit Card?

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The modern lending marketplace gives small business owners a bevy of options for financing or access to capital. While this is overall a great thing for business owners, it’s easy to get overwhelmed by the number of sometimes quite similar options in the marketplace. Specifically, most small business owners have probably asked themselves whether a business credit card or line of credit makes more sense for their business’ needs. Knowing the answer to that question actually takes more than knowing your needs; you also need to know the key benefits of and differences between the two products.

KEY TAKEAWAYS

  • Business credit cards can help your business build good credit.
  • Your business line of credit helps you access revolving financing on demand.
  • Interest rates and your credit limit vary depending on the financial product.
  • Using financing products responsibly is a great way to foster business growth.

WHAT ARE THE PRIMARY DIFFERENCES BETWEEN A BUSINESS LINE OF CREDIT AND A CREDIT CARD?

While a line of credit and a credit card serve mostly the same high-level purpose, access to drawable credit, there are several considerable differences between the two products. Learning about the unique qualities of each product can help your business pair up with that option that best fits your needs – both current and future..

Credit Limit

Depending on how large of a credit limit you need, a credit card or line of credit may make more sense for your business. The credit limit on a business line of credit are typically considerably higher than the average credit card. With lenders like Kapitus, you can access a business line of credit to borrow considerably larger sums.

Credit cards are designed for smaller, short-term purchases. For example, you can use a business credit card to make small purchases of incidentals or to cover a business dinner. On the other hand, lines of credit are ideal for larger investments, such as purchasing inventory, covering payroll or buying more expensive equipment.

Interest Rates

Interest rates are one of the most important factors to think about when taking up any financing product. Being aware of your interest rates is essential to running your business, and taking on a new financing product like a credit card or line of credit requires serious vigilance on the part of the business owner.

Interest rates can vary wildly between a business credit card or a business line of credit.

While credit cards often come with higher interest rates than lines of credit, and holding a balance on your credit card can quickly become very costly, you may be able to completely avoid paying credit card interest if you pay your balance in full at the end of each billing cycle.

With a line of credit interest is charged on the principal balance, but lines of credit often come with monthly maintenance fees, so even if you’re paying your balance in full there can still be that additional monthly cost.

Draw Period

Your draw period defines how long you can continue to borrow money after getting approved. Using a business credit card will enable you to continue to borrow for as long as your account is open and remains in good standing.

Lines of credit are a form of revolving financing with a fixed draw period. Your draw period depends on the lender, but it’s not uncommon for draw periods to last for two to three years and in some rare cases going out as far as five years.. You can continually borrow up to your credit limit during the active draw period.

Fees

Line of credit providers commonly charge origination fees that will typically range anywhere from 1-5%. In addition, some lenders may charge maintenance, draw, and late fees. It pays to speak to your lender before applying for a business line of credit to determine the full scope of fees you can be charged. Every lender has different criteria and every lender charges different fees, so be sure to compare options.

In contrast, business credit cards sometimes come with zero fees, whereas some could charge serious sums per year. Other fees can apply to your business credit card, including cash advance, over-limit, and foreign transaction fees and an annual fee for holding the card.

Payback Periods

The payback period is essentially another word for your billing cycle. The billing cycle determines how quickly you’ll need to make your initial repayments.

Most business credit cards have payback periods of 28-31 days, meaning you’ll need to repay what you borrowed before the end of the billing cycle to avoid being charged interest.

Lines of credit, on the other hand, can have repayment terms of daily, weekly, bi-weekly or monthly, depending on your agreement with your lender.

Added Perks

Credit card companies have become increasingly competitive in an attempt to pull in clients. This means that modern credit cards often come with a collection of incentive perks that, if used wisely, could become a big reason for choosing a business credit card over a line of credit. Some premium business cards tout their perks as a major bonus for becoming a client.

Some of the added extras available via your card could possibly include:

  •       An introductory APR
  •       Purchase protection
  •       Extended warranties
  •       Complimentary airport lounge access
  •       Reward points for cash back, gift cards and travel

Choosing a card based on perks alone doesn’t paint the full picture of what your experience with the card may be, of course. When choosing a credit card, think of perks as a bonus on top of terms that your company is already comfortable with.

Finding the Right Fit for Your Business

Finally, what if your business is looking to cut borrowing costs in the face of rising interest rates? With the right lender, a credit card may offer lower lending costs because of an introductory APR. However, you only stand to gain if you can pay off your outstanding debt before the end of the billing cycle. Further, introductory low APRs generally only last for the first year of using a card.

On the other hand, if you’re a more established business and need a revolving credit line to help cover larger unforeseen expenses or to cover some operating costs in a down period, a line of credit may be a better option for you.

It could also make sense, in some instances, for a business to have both a credit card for smaller everyday expenses and a line of credit as a “nest egg” or to cover those larger expenses.

WHAT ARE THE PROS AND CONS OF A BUSINESS LINE OF CREDIT?

Your business line of credit is a form of revolving credit that enables you to borrow generally larger amounts on demand for a defined drawing period.

Like all types of financing, there are pros and cons to your line of credit.

Pros of a Business Line of Credit

  • Higher Credit Limits – Lines of credit enable you to borrow larger amounts over a specified period. It’s not inconceivable to borrow more than $10,000 as part of a single credit line.
  • Repeated Access to Capital – Repay the outstanding balance, and you’ll have no problems continually borrowing large amounts against your credit line until it expires.

Cons of a Business Line of Credit

  • Shorter Payback Period – Some credit lines have very short billing cycles, and you could be making payments on your balance daily or weekly.
  • No Rewards – Unlike credit cards, there are usually no additional perks or earned points to getting approved for a line of credit.
  • Potentially High Fees – Some lenders levy larger fees to maintain your line of credit. In some cases, the annual maintenance fees can outsize standard credit card fees.

WHAT ARE THE PROS AND CONS OF A BUSINESS CREDIT CARD?

While more than half of small business owners don’t have credit cards (meaning they often rely on long-term financing options), they shouldn’t be discounted as business credit cards can play a role in driving growth within your business.

To decide whether a credit card makes sense, here’s a rundown of the pros and cons of having one for your business.

Pros of a Business Credit Card

  • Effective Credit Building – Regularly using your business credit card and paying the full monthly amount due will likely help improve your business credit.
  • Rewards – Credit card rewards – like points – can be especially lucrative for businesses that regularly draw and restore large amounts of their credit. These rewards can sometimes be redeemed as direct cash back.
  •  Employee Cards – As the primary account holder, you can distribute secondary cards to your employees. This means that travel or other necessary expenses can be charged directly to your company card. This is both a big convenience for your employees and a good boost to your business image.

Cons of a Business Credit Card

  • Qualification – Qualifying for a business credit card generally asks for a high credit score; this may be difficult for some newer businesses.
  • Lower Credit Limit – Business credit cards often have lower limits compared to lines of credit. This means that if you plan on using your credit for larger purchases, you may find a credit card more difficult to manage.
  • Personal Liability – Failure to repay could lead to personal liability, which could also damage your own credit history.

USE CASES FOR A BUSINESS CREDIT CARD VS. BUSINESS LINE OF CREDIT

Consider the following use cases to better understand whether a business credit card or line of credit may suit your needs.

Business Credit Card

Use Case Example
Build CreditBuilding your business’s credit score enables you to improve your credit and qualify for additional financing.
Earn Rewards/CashbackCredit card providers offer additional rewards and cashback, allowing you to cover other expenses, such as travel.
Everyday PurchasesCredit cards make simple transactions quick, easy, and simple to track through your accounting software.
ProtectionMany credit cards offer purchase protection as standard plus other forms of protection, such as trip insurance.

Business Line of Credit

Use Case Example
Cover Every ExpenseCredit cards have limits on the type of purchase you can make with them, such as payroll and leases. Lines of credit have no such restrictions.
Make a Larger PurchaseTake advantage of the higher credit limit of a line of credit to make larger purchases, such as equipment and payroll.
Carry a BalanceBusinesses that need to carry a balance because they can’t make the repayments immediately may prefer a line of credit to avoid incurring excessive credit card interest rates.
Put Up CollateralWith collateral, lines of credit enable far higher credit limits to fund larger purchases, including heavy equipment.

Financing your business’s future requires choosing the right financing option at the right time. Credit cards and lines of credit may seem like similar products, but the two have massive differences in terms of how much you can borrow and how much you can expect to pay.

Brandon Wyson

Brandon Wyson

Content Writer
Brandon Wyson is a professional writer, editor, and translator with more than eight years of experience across three continents. He became a full-time writer with Kapitus in 2021 after working as a local journalist for multiple publications in New York City and Boston. Before this, he worked as a translator for the Japanese entertainment industry. Today Brandon writes educational articles about small business interests.

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Pros and Cons of a Secured Business Line of Credit

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Kapitus secured line of credit small business lending

If your business needs to have fast access to cash, having a business line of credit (BLOC) in place can be invaluable. Before you apply for one, however, one of the first questions you need to ask is whether a secured or unsecured business line of credit is for you. Both options come with pros and cons, so it’s crucial that you carefully consider which is best for you.

What is a Line of Credit?

Secured and unsecured lines of credit are types of financing that give your business the flexibility to borrow funds at will with pre-agreed upon payback terms and credit limit. Whether you need cash to meet a business emergency or to meet payroll during the offseason, you can use the borrowed money to finance any aspect of your business that you see fit. 

Secured and unsecured lines of credits, however, have different risk profiles for the borrower, so they  usually come with different limits and interest rates. 

What’s the Difference? 

A secured BLOC is a form of financing that requires collateral to ensure that you pay back the borrowed amount, while an unsecured line of credit does not require collateral. 

An unsecured line of credit typically requires a high FICO score, a certain number of years in business (usually at least two years) and a strong cash flow. This type of line of credit normally ranges between $10,000 and $100,000, depending on the needs of the borrower, and comes with a variable interest rate often pegged to the prime rate plus several percentage points.

A secured line of credit, while typically reserved for business owners with lower credit scores, requires borrowers to put up valuable assets as collateral. That collateral can include real estate, equipment, present and future invoices and inventory. If you operate a pass-through business, you may even have to put up personal assets such as your house or personal savings. That said, however, a secured line of credit does have distinct advantages:

#1 Secured Lines of Credit Usually Offer Lower Interest Rates

The Federal Reserve has hiked interest rates five times so far this year with more probably coming, so cost of capital is a major concern for borrowers. Since a secured line of credit is collateralized with tangible assets, the lender takes on much less risk when providing this type of loan, so therefore, depending on your FICO score and the amount of collateral you put up, there’s a good chance that the interest rate on a secured BLOC could be lower than an unsecured one. 

#2 Your FICO Score can be Lower

Almost all lenders consider a high credit score to be one of the most important qualifications for financing, so if your FICO score is below 650, trying to secure a loan may be a frustrating experience. Since a secured BLOC is backed by assets, your chance of getting approved with a lower credit score is far higher than if you were applying for an unsecured line of credit.

#3 You Could Secure a Higher Line of Credit

A secured line of credit could come with a higher limit than an unsecured one.

While not in all cases, an unsecured BLOC usually tops out at $100,000 to limit the risk of the lender. Even for small business owners with great credit who are able to get approval for an unsecured BLOC, they often have to put up collateral if they want a limit exceeding $100,000. Depending on the value of the collateral being put up, a small business owner is more likely to obtain a higher limit with a secured BLOC than an unsecured one. 

#4 Secured BLOCs May Have Longer Repayment Terms

Securing your line of credit brings a host of benefits, and one of them is that your repayment term will usually be longer than with an unsecured BLOC. Putting up real estate as collateral can be especially beneficial, as the lender may increase the repayment term and the limit since the value of real estate usually increases over time. In some cases, the repayment term on an unsecured BLOC can be up to 10 years, whereas with an unsecured BLOC, it is usually far less. 

Cons of a Secured BLOC

While a secured BLOC does have its advantages, there are also potential drawbacks to consider before applying for one:

#1 You Risk Your Most Valuable Assets

To get approval for a secured BLOC, you need to put up valuable collateral. These can include your home or a highly valued piece of property. If your business relies on expensive pieces of equipment such as tractor-trailers or medical devices, or the future payment of invoices, those assets could be put up as collateral but would be at risk if you fail to pay off your debt. Therefore – just as you would with a personal loan – it is crucial that you make sure you can meet the repayment terms before you take out a secured BLOC.

#2 More Paperwork is Involved

You’ll probably need to consult with an attorney when applying for a

A secured line of credit will involve a lot of paperwork, as well as advice from a business attorney.

secured BLOC. That’s because you will need an expert to hash out the terms of repayment, especially if calamity hits and you are unable to pay back the amount you borrowed. An attorney can negotiate terms of what assets you will have to surrender in case you default on payments. 

#3 Interest Rates Vary

While the interest rate on a secured BLOC is generally lower than an unsecured one, the rate will still be variable, meaning that it will fluctuate as interest rates fluctuate. This underscores the importance of making sure you understand the exact terms of the secured BLOC before you take one on. 

A BLOC is not a Credit Card!

There is a common misconception that a line of credit is like a business credit card, but don’t be mistaken – the two are not the same. Yes, they both provide a line of credit and only charge interest on the amount you borrow. However, a line of credit ideally should be used for bigger, foreseeable expenses than a credit card since the interest rate is typically lower, and in some cases, you won’t get the cash from a line of credit for 24 hours. Plus, lines of credit have term limits and different repayment terms than a credit card. 

A business line of credit is a great tool if you need to get new office furniture or appliances, if you need cash for a business emergency, or if there is unexpectedly high demand for one of your products and you suddenly need to purchase more inventory. On the other hand, a business credit card is handy for sudden cash needs, such as picking up the tab for a business meal, or if your flight gets canceled during a business trip and you suddenly need to pay for a hotel room. Business credit cards also offer perks such as travel miles, but generally charge a higher interest rate than a BLOC. 

Carefully Weigh Your Options

A secured BLOC can give you great benefits if you need access to cash to grow your business or for an emergency. However, you need to carefully consider the terms of this type of financing, and like you would with your personal finances, you shouldn’t spend more than you need to.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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What are the Different Business Lines of Credit, and Which One is Best for Your Business?

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Business lines of credit are incredibly valuable tools that offer flexible financing to help small business owners meet expenses and grow. Lines of credit, much like your personal credit card, have borrowing limits and make funds available to you when you need them. They also give you the option to pay down some or all the debt at various, pre-agreed upon intervals. You only pay interest on the amount that you’ve used, and most lines of credit will require you to bring your balance to zero at certain times. 

The benefits of having a line of credit are tremendous, and in some cases, businesses may not be able to survive without one. For example, seasonal businesses may use a line of credit to meet payroll during the off-season or to order inventory in advance of their busy seasons. Credit is also used in case your small business quickly needs emergency cash.

Before you apply for one, however, you should consider that a line of credit is not a one-size-fits-all product. There are different types of lines of credit that you should consider before deciding on which one is best for your business.  Some credit lines may offer higher lines of credit while others may require collateral..

Deciding on the right one for your business can be tricky, and it’s important to know the different types that are available to you, as well as the risks associated with each one:

#1 Secured Line of Credit

A secured business line of credit is one in which you, the borrower, take on a significant amount of risk. In these types of credit lines, you will have to put up collateral, such as your business assets, personal savings, or surplus business cash; or, if your business is a pass-through business, your personal assets such as your home. In the event you can’t pay off your balance, the lender reserves the right to seize those assets. 

That said, there are distinct advantages to a secured line of credit over an unsecured line. First, since you’ve put up collateral, there is a good chance that your line of credit will be bigger than it would be with an unsecured line of credit. Second, since you’re the one taking on much of the risk with a secured line, you most likely will pay less interest. Third, you don’t typically need as high of a credit score as you would with an unsecured line of credit.

#2 Unsecured Line of Credit

An unsecured business line of credit is the more popular option for small businesses since this option requires no collateral, and the lender takes on most of the risk. Applying for an unsecured line of credit is often simpler than a secured line, and approval may be quicker. 

An unsecured line of credit typically carries the same payment requirements as a secured line of credit, but in exchange for taking on much of the risk, the lender will usually require a strong credit score to obtain one. Since it is unsecured, the spending limit may not be as high as a secured line of credit, and the interest rate may be higher than a secured line of credit.

#3 Business Credit Card

If you need to pick up the tab for a business meal or must purchase new office equipment such as a laptop computer or printer at a moment’s notice, a business line of credit would not be convenient for you since it could take days to transfer money from your line of credit to your account. A business credit card, however, is a very handy tool to fulfill immediate cash needs for your business. 

A business credit card works pretty much the same as a personal credit card – it could offer perks such as travel miles and cashback rewards and will be there when you need it. Business credit cards usually have fewer requirements to obtain than a line of credit, and they won’t tie up your personal assets as they don’t require collateral. 

The drawbacks compared to a line of credit, however, is that business cards usually carry a higher interest rate than a line of credit, and many of them charge an annual fee.

#4 Real Estate Line of Credit

If you’re in the business of buying and selling properties, such as a home flipper, for example, then you should consider a real estate line of credit. A real estate line of credit is similar to a home equity line of credit, which is credit based on how much equity you have invested in a piece of real estate. 

Real estate lines of credit work in a similar way to any other lines of credit. They can be either secured or unsecured, depending on your FICO score, and they allow you to buy a piece of property before you sell your existing property.

Choose Carefully

Before you decide to take out a business line of credit over another form of financing, you should carefully consider the reason you need to borrow money in the first place. Lines of credit are probably not good for long-term business needs such as the purchase of expensive but crucial equipment or an office lease, and typically carry higher interest rates than other short term financing products. 

If you have immediate cash needs or want cash available in case there’s an emergency, such as your air conditioner breaking down or a leaky roof in your office, then a line of credit is probably the best solution for you.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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The Benefits of Business Lines of Credit 

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For small business owners that have ongoing business expenses and uneven cash flows, a business line of credit may be the most convenient and useful financing method in your toolbox. 

Too often, however, small business owners confuse a business line of credit and a business credit card and end up paying a higher interest rate on revolving debt as a result.

What is a Business Line of Credit?

A business line of credit is typically an unsecured line of credit that can be granted to a small business by either a bank or an alternative lender. The line of credit has a predetermined limit set by the lender (and it’s typically higher than a business credit card) based on the risk you present as a borrower, and like a business credit card, can be used to address any expense that arises for your business. 

Unlike other types of typical small business loans, with a business line of credit, there is no lump-sum disbursement of funds that requires a subsequent monthly payment, and you don’t have to specify to the lender exactly what you intend to use the funds for. 

Also, similar to a credit card, your debt will be revolving, and interest will be accrued only on the amount that you have borrowed. The line of credit typically is subject to a periodic review and renewal, often annually..

Business Line of Credit vs. Business Credit Card 

While both a business line of credit and a business credit card are forms of revolving debt that are typically used for short-term funding needs, the main differences between them are the interest rate and what they generally are used for. 

A business credit card can charge more than 20% APR for purchases, and an even higher rate for cash advances. The rate for a business line of credit usually ranges between 10% to 15%, and the rate will still be the same when you use the line of credit for cash. 

What are Each Used for?

A business line of credit and a credit card may also be used for different reasons. Lines of credit are sometimes used by seasonal small businesses that need funds to cover operating expenses during slow periods of the year, such as payroll; or when it has an unexpected expense. Small businesses can also use their lines of credit to gain access to funds without having the hassle or expense of applying for a loan, and the repayment terms are often more flexible than with business credit cards. 

On the other hand, a small business credit card will come in handy for smaller purchases that you typically wouldn’t use your line of credit for, such as when you have to pick up the tab for a business meal or need to buy a new inkjet printer for the office and don’t wish to make a trip to the bank to withdraw the funds. A credit card also often offers perks such as cash back offers or travel miles that a line of credit would not.

Once again, be warned that business credit cards typically offer a lower credit limit than a business line of credit and are more expensive.

What is a Secured vs. Unsecured Line of Credit?

An unsecured line of credit is not guaranteed by collateral. Typically, it will carry a higher interest rate than a secured line of credit because the lender is taking on greater risk than with a secured line of credit. It is usually granted to businesses that have been in operation for several years and have consistently strong annual revenues. 

With a secured line of credit, you will usually be granted a large business line of credit with a higher spending limit because it is guaranteed by physical assets, which lenders prefer. Some banks, however, may ask that your personal assets be used to secure your line of credit, while alternative lenders typically just ask for your business assets. A lender may also require that you secure your line of credit if you require a limit of more than $100,000.

How Do You Qualify for a Line of Credit?

Business lines of credit are generally more difficult to obtain than business credit cards. Typically, small business owners that have a FICO score of at least 650 and have been in business for at least two years with annual revenue of at least $180,000 will qualify for a business line of credit, but those terms will vary depending on which lender you are doing business with. Alternative lenders often will have less stringent requirements.

Small businesses that don’t qualify for a business line of credit because they don’t have a long history in business or a profit margin that’s too low may find a business credit card to be useful, and there are plenty of them out there that offer perks and cashback rewards. 

In general, however, a business line of credit can be a great reward for small business owners that have worked hard to establish their businesses over time.

Vince Calio

Vince Calio

Content Writer
Vince Calio has been a writer for Kapitus since 2021. Before that, he spent three years operating a dry-cleaning store in Rahway, NJ that he inherited before selling the business, so he’s familiar with the challenges of operating a small business. Prior to that, Vince spent 14 years as both a financial journalist and content writer, most notably with Institutional Investor News and Crain Communications.

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