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Business Lines of Credit 101: How They Work and What You’ll Need

In 2022, it’s more important than ever for small business owners to have flexible revenue to deal with maintenance, scaling, and the unavoidable roadblocks on the path to success. However, the number of business loans and the severity of their repayment plans aren’t necessary for the small day-to-day requirements of a growing company. In many cases, all a small business needs is a flexible revenue source. In these situations, the best option for entrepreneurs is to set up a business line of credit (LOC).

Unlike business loans, which offer more money over more significant periods, lines of credit are flexible. Business LOC offers a revenue pool you can draw on and repay from, depending on the requirements of your business.

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What are Business Lines of Credit, and How do they work?

Business lines of credit are similar to personal credit cards in that they provide a fixed pool of revenue from which businesses can draw. Unlike credit cards, LOC allocates a specific amount of capital from a trusted lender with a specified repayment period. You can borrow only as much as you require and pay back the loan as you borrow. It’s important to remember that there is no one-size-fits-all line of credit option. Many LOC at different rates exist, and finding the best option will require some shopping around. Luckily, BitX Funding provides you with the resources to find the best LOC options for your business.

The main reason to get a business line of credit is for access to short-term funding. Depending on the business, this could involve capital for seasonal business, accounting for late invoices, or supplies for a long-term project. The beauty of LOC is its flexibility. The credit goes towards any business expense. Finding a more niche loan option could save you money in some cases, such as invoice financing or equipment financing. Make sure to choose the best option for what needs the most capital.

Popular Uses of a Business Line of Credit

  • To maintain revenue during downtime, especially for seasonal businesses with a cyclical cash flow.
  • Unexpected periods with low sales.
  • To stay on top of payroll.
  • To account for long invoices or contracting projects that take several months to complete.
  • During the production or startup of a new project/product.
  • To pay bills early at a discounted rate.

In summary, business LOC put a premium on flexibility in accounting for uneven cash flow and giving more day-to-day options to small business owners. The money is often accessible within 24hrs, and you can put it towards any business use. In addition, having a LOC option gives small businesses the necessary edge to maintain and grow their businesses to success.

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Finding the Right Lines of Credit: Secured vs. Unsecured LOC

Just as there are different loan options for different business needs, lines of credit also vary in what they can offer. The more risk a lender takes in providing credit, the more limits they will place on that cash flow. Offering collateral for a LOC is usually the best option for the lender and borrower. By providing collateral, the lender is more secure and can offer more finances at a lower rate. With that in consideration, businesses with excellent cash flow, a proven track record, and excellent credit can apply for unsecured loans at reasonable rates.

Secured Lines of Credit

Secured lines of credit require the borrower to use assets as collateral to secure the loan. Lenders will typically ask for short-term investments to account for the short-term liability they are taking on rather than capital assets. However, collateral can include property, equipment, accounts receivable, and inventory.

Because the lender can liquidate assets if the borrower cannot repay the loan, the lender has less risk. In turn, collateral can yield better interest rates at a better credit maximum for small business owners looking to secure a loan.

Unsecured Lines of Credit

While unsecured LOC is attractive to business owners because they do not require collateral, getting the same rates as a secured loan isn’t easy. Lenders take on a higher risk and usually need splendid credit and proof of steady cash flow over multiple years. In addition, unsecured LOC runs a higher interest rate with smaller credit lines.

Business Credit Cards

A form of unsecured loan, business credit cards can be an extra layer of flexibility for savvy small business owners. However, this option will offer the least amount of credit with the highest interest rates. Additionally, business credit cards will be more strict on transaction fees, cash advance fees, and repayment plans.

Steps to Success: How to Qualify for Business Lines of Credit

Once you’ve decided that a business line of credit is the right option for you, it’s essential to understand the requirements. The first step is determining which loan option is best for you and gets you the most value for growing a small business. Check out BitX Funding’s LOC to find your loan for assistance with matching entrepreneurs with suitable loans. When shopping around for loans, don’t be disparaged if you need to apply for multiple lines of credit at varying interest rates. Look at the interest rate options available to find the best deal for your small business.

The next step is to make sure you qualify for the specific loan. As a minimum guideline, we recommend at least one year in business, a 600+ credit score, and 100k annual revenue. Additionally, be prepared with collateral, preferably short-term assets, that you can leverage to get a great deal on a secured LOC.

When you’ve found the loans you want to apply for, gather the necessary documents and have them ready to submit with each relevant form. Documents you’ll need when applying to include:

  • Photo Identification
  • Bank Statements
  • Financial Statements
  • Tax Returns
  • Articles of Incorporation
  • Proof of Collateral
  • Credit Reports

Advantages and Disadvantages of Using Business Lines of Credit

No one credit option applies to all businesses. Once you understand the requirements for applying for a LOC, it’s good to know if it’s the best fit for your small business. While a great option for covering small business expenses or accounting for low-revenue periods, it’s good to know the advantages and disadvantages of business lines of credit.

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LOC Pros

Business lines of credit offer one of the most flexible cash reserves available for small businesses. The money provided by the lender is available at any time for any business purchase. Additionally, rather than paying a flat sum for a given loan, you spend what you borrowed and only borrow what you need to account for various expenses. In fact, interest rates on LOC can be balanced much more quickly by paying off balances before they’re due.

Another great reason to use LOC is that they’re easier to qualify for than longer-term loans. The requirements to qualify aren’t nearly as severe, and you can access the money within 24 hours if using a trusted lender such as BitX Funding. In fact, savvy business owners can use LOC to increase their credit scores by only withdrawing what they need and paying ahead of time. Overall, the flexibility afforded by LOC is its most powerful feature.

LOC Cons

With that in mind, LOC trade-off their flexibility for higher interest rates and a lower cash reserve to draw from than longer-term loans. Because lenders take more risk with lines of credit, especially unsecured lines, they compensate by adding higher or fluctuating interest rates. LOC may include setup fees, and ongoing paperwork is required to let lenders know the value of their investment.

How to Make the Most of Your Lines of Credit

Are you looking to expand your growing business and require a flexible cash source to meet your demands? If so, BitX Funding is the online marketplace for you. We specialize in securing loans for small business owners to compete in the global market. With plenty of resources to help you learn the ins and outs of lending, we can help you get the best loan options for your small business.

We believe that small businesses drive the economy and are enthusiastic about helping small business owners meet their fullest potential.

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Published by Chris Davies, Creative Copywriter at The Labate Group in Westport, CT.

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