Business Line of Credit 101

If you own a small business, you’re probably going to experience cash flow problems from time to time. You may need to cover an unexpected expense, buy equipment or inventory, or deal with seasonal fluctuations in profits or operating costs. When it comes to borrowing money for expenses during lean times, a business line of credit may be the answer.

What is a Business Line of Credit?

A business line of credit is like a credit card without the plastic. It’s a type of revolving loan that gives borrowers access to a fixed amount of money, which they can use to cover day-to-day expenses as needed. A business line of credit is intended mainly for short-term financial needs, like purchasing supplies, and it can be beneficial for companies that have variable operating expenses or need to purchase large quantities of inventory up front.

Types of Business Lines of Credit

There are two main types of business lines of credit, and each come with pros and cons:

• Secured Business Line of Credit: With a secured business line of credit, borrowers must put up short-term assets, like inventory or accounts receivable, as collateral. If the business owner can’t repay the loan, the lender will take ownership of those assets to pay off the balance. A secured line of credit is usually approved for a larger amount and with a lower interest rate because of the collateral.
• Unsecured Business Line of Credit: Borrowers can secure unsecured business lines of credit without collateral, provided they have a strong credit rating and business track record. Because lenders are assuming more risk by not seeking collateral, interest rates are generally higher and credit lines are smaller. Unsecured business lines of credit are harder to qualify for than the secured type.

How to Get a Business Line of Credit

Most major lenders that serve small businesses offer business lines of credit. Credit limits can start as small at $5,000 and go up to $100,000. To qualify for this type of loan, a business must do the following:

• Demonstrate positive cash flow. Lenders want to know that you have the ability to make regular payments against your loan.
• Have good credit. Lenders want to minimize risk, and the lower the credit score, the riskier it is to give a business a line of credit.
• Shop around for the best deal. Explore all of your options before you sign on the dotted line. Compare credit line limits and terms at commercial, community and online banks, as well as credit unions.

It may be tempting to try to get a business line of credit for a larger amount than you need, but it’s best to start small. You can always increase your limit later.

Microloans: An Alternative to Business Lines of Credit

If you’re unable to qualify for a business line of credit-or can’t qualify for one with terms that you’re conformable with-you can secure small amounts of money for your business with a microloan. Microloans are usually given in amounts of $50,000 or less, and they’re typically easier to get than traditional business lines of credit from commercial banks. To secure a microloan, you may have to provide some collateral as security for the loan, and you may be asked to sign a personal guarantee.

Microlenders like Accion Opportunity Fund look for the following when considering small business applications for microloans:

• Does the business have enough cash flow to be able to make repayment?
• Is this business owner current on all business and personal bills?
• Is this business owner’s financial history free of bankruptcies or late mortgage payments in the last year, and foreclosures in the past two years?

Cash flow problems don’t have to cripple your business. With options like business lines of credit and microloans available to you, your business should be able to weather any financial storm.

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