business line of credit
what is a business line of credit?
Running a small business means being prepared for a multitude of expenses at a moment’s notice. While some owners take out loans and other open credit cards, there is actually a third option you can use for short-term financing – a business line of credit. Put simply, a business line of credit extends a limited amount of credit to you that can be accessed as needed to cover them.
line of credit vs. credit cards
What sets a line of credit apart from other financing options, though, is the flexibility it offers. Unlike a credit card, a line of credit offers cash withdrawals, so you can pay things like payroll, rent, etc. that are not payable by credit card. Lines of credit also work on an as-needed basis, meaning that while you have a set total limit you can withdraw, you only take out as much as you need at a time. As a result, you’re only charged on interest on what you take out rather than having to pay back and pay interest on a total lump sum as you would with a loan. The same goes for paying it back. For example, you may be approved for a business line of credit totaling $100,000, but you may opt to only use $20,000. Your obligation would then be to repay the $20,000 + applicable interest and not a cent more.
Unsecured vs. Secured
One way that lines of credit are similar to loans is that they are offered in unsecured and secured variations. A secured line of credit gets its security from collateral. The lender will put a lien on one of your assets to guarantee their money. In turn, the limits on secured lines of credit are typically higher and the interest rates are typically lower. An unsecured line of credit is harder to get and cost more in interest as the lender takes on a bigger risk. However, if you don’t have much to offer as collateral, this may be the best way to get fast cash to pay expenses.
How do I apply for a line of credit?
While some banks and lenders may have their own unique process to apply, below is a general outline of what you’ll need to do:
Investigate Your Options
If you’re at the point of applying, you’ve already decided that a line of credit is your financing option of choice, but that’s not the only decision you need to consider. Which lender will you choose? What credit terms fit your needs best? For example, do you want a lower limit or are you ok accepting higher interest if it means more funding? Do your research and call around to be sure you know what’s available.
Build Your Credit Score
Obtaining a line of credit hinges on you presenting well to your lender. Without a strong credit score, you’ll have a hard time convincing anyone you’re worth the investment. As mentioned above, unsecured lines of credit put even more risk on lenders and therefore require an even stronger credit score than secured lines. If you don’t think you have a solid enough score right now, take time to build it up by switching more of your purchasing to credit cards and being sure to repay bills on time. Also refrain from opening too many new accounts as they will lower the “average account age” factor of your score.
Organize Your Papers
Just like a loan application, a line of credit application typically requires a lot of documentation. Financial statements, bank account information, tax returns and references are some of the paperwork you should be prepared to present.
You know the type amount of credit you need, you’ve narrowed down your potential lenders, your credit score is good, and you have your papers together. Now it’s time to apply. Typically, lines of credit can be applied for online, although, some traditional banks may still require in-person interviews.
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CONEXT® does not offer business lines of credit, and we also don't run your credit score, require collateral, or charge interest fees. Our small business financial solutions are debt-free and cost one transparent rate - 3%.
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