The AFN Guide to Business Line of Credit

Whether you want to grow your business or just improve your month-to-month cash flow, a business line of credit can be a flexible business financing tool. Here’s what you need to know about obtaining and using a business line of credit.

What is a business line of credit?

A business line of credit is a flexible way to borrow the amount of money you need, when you need it, up to a set credit limit. It’s like a credit card for your business, except it will usually have a higher credit limit and a more competitive interest rate. Unlike a conventional business loan, you are not required to make set payments, and when you do make a payment, it replenishes your available credit.  

Each lender and lending platform has its own rules, but at Advance Funds Network, we offer business lines of credit with daily or weekly payments and terms ranging from one to 12 months.

How does a business line of credit work?

There are a number of features that are part of a business line of credit, including:

  • The credit limit, which is the maximum amount you can borrow
  • The interest rate that you will pay on an annualized basis
  • Fees that may apply when you draw money from the line of credit
  • The term or amount of time within which you will repay the line of credit

The payment amount that you will make on a daily or weekly basis

Here’s an example:

Fabio’s Fabricating often needs to purchase raw materials in order to complete projects before they get paid by their customers. Fabio applied for a business line of credit and was approved for $100,000. In January, he drew $40,000 from his line of credit to start a project, which left him with $60,000 in available credit. In February, he received payment on another project and repaid $30,000 to his line of credit, which bumped his available credit back up to $90,000. In April, he needed to draw another $20,000 from his line of credit, which meant he owed $30,000 and had access to another $70,000 if needed. In May, he was paid for the project he started back in January, and used the money to fully repay his line of credit, resetting his available credit to $100,000. A business line of credit gave Fabio the flexibility to borrow and repay funds when needed to keep his projects moving forward and his business in a healthy cash position.

How does a business line of credit work?

If you’re trying to decide between a business term loan and a business line of credit, it helps to know whether you need a single lump sum or access to smaller amounts at different times. With a business term loan, you receive the full amount of the loan right all at once and payments begin immediately. With a business line of credit, you can draw smaller amounts as you need them until you reach your credit limit, and you only have to make payments on the amount you have drawn, which could lead to lower interest costs overall.

Here’s a comparison of a term loan versus a line of credit:

Stan’s Suits took out a business term loan for $40,000. At the start of the year, Stan signed a loan agreement saying that he would pay the loan back over 12 months at 16% interest. By the summer, Stan had paid off half his loan and spent over $3,000 on interest so far.

Dolly’s Dresses took out a business line of credit for $40,000 at the same 16% interest rate. Dolly drew $20,000 from her line of credit at the start of the year. By the summer, she had only spent about $1,500 on interest, because she had only used half of her available credit. In the fall, when she needed another $20,000, she simply withdrew it from her line of credit.

What does “revolving credit” mean?

A business line of credit is a form of revolving credit, meaning that you can keep borrowing money up to a predetermined credit limit and pay back the money you borrow over time. Every time you pay off some of your balance, you are able to borrow those funds again in the future. This is different from a business loan, where you cannot re-borrow the funds you have already paid off.

Is my business a good fit for a line of credit?

A business line of credit can be an excellent fit if you need quick access to funding, if you anticipate borrowing multiple smaller amounts rather than one large amount, and if you expect to be able to pay the funds back relatively quickly.

What can a business line of credit be used for?

There are no restrictions on how you use a business line of credit, but there are two main categories:

Covering your expenses

  • Repairing equipment
  • Renovating premises
  • Restocking inventory
  • Obtaining raw materials
  • Paying unexpected expenses
  • Meeting operating capital needs

Expanding your business

  • Buying equipment, vehicles, or machinery
  • Purchasing another business
  • Moving into a larger space
  • Acquiring customers
  • Investing in marketing / advertising
  • Seizing a time-sensitive opportunity

How do I qualify for a business line of credit?

The main qualification for a business line of credit is to have an existing business with a history of revenue. At Advance Funds Network, there are three minimum requirements for a business line of credit:

  • Three months or more in business
  • 550 or higher personal credit score
  • $10,000 or more in monthly business revenue

In addition to these criteria, a potential lender will want to know what other debts you are currently carrying as they may not wish to be in line behind too many other lenders.

Can I qualify for a business line of credit with bad credit?

You may be able to qualify for a business line of credit even if you fall short of what is considered a “fair” credit score. The consequence of having a weaker credit score will likely be a higher rate of interest. If you do not meet the credit requirements for a line of credit, you might wish to explore other options, such as short-term business financing, which gives you funds that are secured by your future sales and typically does not depend as much on your credit rating.

How do I apply for a business line of credit?

Not every provider is the same, but at Advance Funds Network, you can apply online in minutes, speak to a dedicated Financial Advisor almost any time of the day or night, and potentially receive funding in just a few business days. 

Here are the typical steps to apply for a business line of credit:

  1. Application. You’ll be asked to provide basic information about your business, consent to a credit check, and submit bank statements and potentially tax returns if you are seeking a larger amount. You’ll need to have been in business for at least three months, have sales of at least $10,000 per month, and have a personal credit score of 550 or higher.
  1. Approval. You can expect a yes or no answer very quickly. If you are using a business lending platform like Advance Funds Network, you may receive offers from more than one provider.
  1. Funding. Once you accept an offer, your business line of credit will be opened and you will be able to draw money from it. Depending on the terms of your financing, you will start to pay back the line of credit on a daily or weekly basis.

What are the advantages of a business line of credit?

A business line of credit is one of the fastest and most flexible ways to secure funding for your business. Here are some of the main advantages:

  • Quick funding. You can potentially receive funds within a few business days.
  • Flexible borrowing. You can access funds when you need them, whether it’s to top up your working capital, make an investment, or cover an emergency.
  • Flexible repayment. Although there are minimum payments to maintain, you can repay some or all of your balance whenever you want, and the money you repay is added back to your available credit.
  • Interest savings. Since you only pay interest on the money you have drawn from your line, you may pay less interest than you would with a cash advance or business loan.
  • Tax benefits. When you borrow to invest in your business, the interest portion of your line of credit payments is deductible from your taxable income.

Stronger credit. Repaying a business line of credit may strengthen your credit score and give you access to more credit and lower rates in the future.

What are the disadvantages of a business line of credit?

Here are some potential disadvantages of a business line of credit:

  • Cost of borrowing. You will pay interest on any amount that you withdraw, so it is important to plan your spending and keep your debt load manageable.
  • Short-term nature. A line of credit is not meant to be a long-term financing tool, and you may be required to fully repay the balance within one year.

Personal guarantee. Even though the line of credit is for your business, it will be backed up by your personal credit score and financial assets.

What are some alternatives to a business line of credit?

As a business owner, you have many financing options, and some of them might be a better fit for you than a business line of credit, such as short-term business financing, a term loan, or a credit card. Here are some of the main alternatives to consider:

Short-term business financing 

Many business owners choose short-term business financing, such as a Merchant Cash Advance (MCA), as an alternative to a line of credit. Short-term business financing is not a loan so there is no collateral required. Instead, it is like selling a portion of your future receivables to a finance company in exchange for receiving cash today. The finance company will recoup the advance in daily or weekly installments that are based on your projected sales. This can make qualifying easier than a line of credit.

Business term loan

A business term loan gives you an immediate lump sum of capital that you will be required to repay with interest over a set period of time. One of the advantages of a business term loan compared to a business line of credit is typically a lower interest rate and a more structured repayment plan, with fixed payments and a set term, which some business owners may prefer.

Business credit card

A business credit card can be very flexible, as you are free to spend up to your limit without the need for approvals. However, the limit may not be enough for your business funding needs and the rate of interest will generally be high. A business credit card can be handy, but it may not be sufficient to replace a business line of credit or other forms of funding.

How can Advance Funds Network help with a business line of credit?

Advance Funds Network is your gateway to business funding solutions of all kinds. If your business has been running for at least three months and has sales of $15,000 or more per month, you could qualify for a business line of credit. But why wonder? Apply online in minutes and you’ll hear from us soon with the best available funding options. You can also connect with a dedicated Financial Advisor now at (866) 480-2611.

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