7 ways a line of credit can benefit small businesses

If you own a business, you probably already know that sometimes you need access to working capital to help you grow. Working capital is calculated by your current assets minus your current liabilities or debt—this is a measure of your company’s short-term financial health.

Even the most successful small businesses experience late invoice payments, urgent unplanned expenses, and other short-term situations where cash flow is less than certain. In cases like these, access to some extra funds can mean the difference between closing your business or surviving the tough times and coming out on top.

When it comes to business financing, you’ve got an enormous array of options to consider. A business line of credit is a popular choice among small business owners.

Read on to learn 7 ways a line of credit can benefit your business and how to apply.

What is a business line of credit?

A line of credit is a predetermined amount of funds that you can borrow when you need and pay back later. Unlike a traditional term loan, you can use the funds as you need them for business purchases like inventory, supplies, or operating expenses.

Another benefit is that you can typically pay back your credit line anytime, without any early repayment fees. Calculate the estimated pricing with Fundox’s line of credit cost calculator.

A critical difference between lines of credit and term loans is that lines of credit are “revolving.” That means you can use the funds, up to your approved amount, then repay what you’ve used, with interest, to make the funds available again. Term loans, on the other hand, are lump sum loans that you use once and repay once, with interest.

How you could benefit from a business line of credit

1. Smooth out your cash flow 

All businesses need access to funds to run their operations, but sometimes there isn’t quite enough working capital available when you need it. You might be waiting for your favorite big client to pay their invoice, or you might need to purchase an expensive new piece of equipment. A business owner may face things like making payroll during slow seasons, work shortages, or surviving a temporary dip in sales.

Situations like these may seriously affect your cash flow and even threaten the stability of your business. If you’ve got a line of credit in place, however, you can handle these challenges with confidence, knowing you have access to the capital you’ll need. In short, a business line of credit is useful for handling liquidity or cash flow volatility challenges that many owners commonly face.

2. Take advantage of new opportunities

A credit line can come in handy for things like:

• Hiring new employees to meet a growing demand for your services
• Covering payroll
• Opening a new office or expanding to a new location
• Purchasing inventory to get ready for a busy holiday season
• Running marketing campaigns

3. Have flexible access to funds 

One of the primary benefits of a business line of credit is its flexibility. Once approved for a business line of credit, you can draw funds when you need them, and use them for whatever legitimate business purpose you want. Unlike a term loan, funds from a line of credit are revolving, meaning that when you pay them back, you can use the funds again.

4. Pay interest only on the portion of credit you use (sort of) 

With a business line of credit, you aren’t charged interest on the unused portion of the funds, only the part you use (plus fees, depending on the situation).

For example, if you have $60,000 and you use only $20,000, you will only have to pay interest on the $20,000 used. This is in contrast to a term loan, where you are charged interest on the full lump sum. When it comes to fees, make sure you understand them upfront. Some lenders will charge fees to keep your account open, for “inactivity,” and for other miscellaneous purposes, so it’s always a good idea to thoroughly understand and inquire about any potential fees before you commit.

5. Developing a lender-borrower relationship 

Cultivating a good relationship with a lender can be extremely beneficial later on. If you develop a good relationship with your lender through the responsible use of credit, this can lead to help from your lender if you need a credit increase or further finances for projects in the future.

6. Build a better business credit rating 

If your lender reports back to the credit bureaus, using your line of credit carefully and repaying on time can be an excellent way to build credit. This can benefit you by raising the credit rating of your business. This can help you in the future if you ever need more credit or a term loan. Ask your lender if they do report back to credit bureaus; not all of them do.

7. Access funding with lower interest and lower fees 

For some business expenses and situations, it’s often better to use a business line of credit than a business credit card, because business lines of credit might have lower interest rates than business credit cards. 

A business line of credit operates like a credit card as explained above, with a revolving balance, but they often offer lower interest rates, and there are no fixed payments. Though it’s important to check the lender’s terms and conditions before applying for a business line of credit, most of them are flexible and allow you to pay off the complete balance when it’s convenient for you.

However, be advised that there are lines of credit that are just as expensive as credit cards, if not more so. Even if a line of credit does not come with prepayment fees, they might front-load the fees, so you do not save as much by prepaying. If you are hunting for lower costs, it’s always wise to compare your options carefully before deciding.

What are the requirements to get a business line of credit?

To get approved for a business line of credit from a bank, you’ll need to complete a thorough application process. When you apply, the prospective lender will review your financial statements and assets, and more.

Here are some common requirements for getting a new business line of credit from a major lender. This is not a complete list and different lenders may have different requirements, but this will give you a good idea of what you might need to provide.

Collateral‍

‍A secured business line of credit is safeguarded by collateral which you provide. This may include (but is not limited to): real estate equity, physical inventory, equipment, or accounts receivable. Your business guarantees the loan with that collateral, reducing the risk for the lender. Sometimes a lender will tell a small business owner to pledge all of their assets to secure a business line of credit.

Business operating time

Most lenders will have a requirement that a business be in operation for a certain length of time before qualifying for a line of credit. Some lenders (such as major banks) may only consider businesses that have been in operation for at least two years. If the lender feels a startup has good collateral and sound personal credit, it may make an exception. Time in business requirements may differ from lender to lender, so be sure to ask.

Financial statements and reports

‍‍Many banks require extensive financial statements along with income tax returns spanning at least two years to consider your business for a line of credit.

Profit and revenue

Your business should generate revenue to be eligible for a business line of credit. When you apply, chances are you will be asked to provide proof of revenue and business health. In cases where there is not enough income or profit to satisfy the lender, the business may have an option to provide collateral in case of default.

Guarantee

If your business is a subsidiary of a big organization, the lender may need the parent organization to give a guarantee for your subsidiary before it gives a business line of credit to the subsidiary. If you’re an independent small business owner, you may need to make a personal guarantee.

‍Economic ratios

By cross-checking certain important economic ratios of your business, the lender can estimate your business performance. These ratios may include:

• Debt to equity
• Current ratio
• Debt service coverage ratio
• Fixed-charge coverage ratio

Where can you apply for a business line of credit? 

If your business is looking for an unsecured business line of credit, there are many lenders in the market. For example, credit unions, online banks, online lenders, commercial banks, and community banks. Credit limits might be as low as $5,000 and as high as $500,000. On the low end, you would most likely be dealing with smaller banks or online lenders, since banks rarely go as low as $5,000.

If the business is less than two years old, certain banks may approve a business line of credit in partnership with the Small Business Administration (SBA). The SBA CAPLine program provides businesses that meet its requirements with four different business lines of credit for their temporary working capital requirements.

Consider a Fundbox Line of Credit

It used to be that a major bank was one of your only options for getting access to a business line of credit, but not anymore. Business owners have many financing options to choose from, many of which are faster, easier, and more flexible than applying for a line of credit with a bank.

Fundbox is one such option! Fundbox is a financial technology company built on the mission of helping business owners get access to growth capital so they can succeed. Since 2013, Fundbox has connected to over 500,000 small businesses and helped thousands of owners get access to flexible funds, up to $150,000*.

Unlike a lump sum term loan, a Fundbox Line of Credit offers flexible access to funds you can use to optimize cash flow to cover expenses like payroll, insurance, marketing campaigns, and more.

How to apply for a Fundbox Line of Credit

You can apply online for Fundbox credit in two simple steps. Unlike a traditional business loan application, you will not have to complete any paperwork to get started, and you can get a decision in as little as a few minutes.

Applying is safe and secure and will not impact your credit score. Simply enter your business information and connect your business banking account to apply. If you’re approved, you could receive funds as soon as the next business day.

Who is eligible for a Fundbox Line of Credit?

To qualify for Fundbox credit, your business should meet the following requirements:

• Based in the U.S.
• $100,000+ in annual revenue
• 6+ months in business
• 600+ personal FICO score
• Has a business checking account
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Apply for a Fundbox Line of Credit today.

*Loans and lines of credit are made available by Fundbox and bank partner, First Electronic Bank, member FDIC. Credit line amounts, rates, and terms are based on creditworthiness and subject to change, additional documentation may be required.‍