Payday is coming, but your largest customer has not paid yet. With the reduction of corporate bank accounts, you begin to worry: “Can I send payroll next week?”
For many small businesses, uneven cash flow is a problem, and business credit lines may be the solution. A commercial line of credit is a type of commercial loan that functions more like a commercial credit card, allowing you to withdraw funds when needed and repay them over time.
Businesses usually use credit lines to spend the off-season, purchase materials or inventory, or provide financial cushions in emergencies. Read on to find out if this is right for your business.
How does a business credit line work?
Most business credit is revolving credit. Just like a credit card, a revolving commercial credit line provides you with the highest credit line you can borrow.
You can carry the balance and pay at least the minimum monthly, or you can pay it off in full; the interest-only depends on the amount you borrowed.
When you repay the borrowed funds, the revolving credit line allows you to borrow more without applying for a new credit line. However, some commercial credit lines do not allow you to repay debts.
These require you to reapply after paying off the borrowed money. There are two basic forms of commercial credit: secured and unsecured. A secured line of credit requires collateral.
These may be business assets, such as equipment, inventory, or accounts receivable, or personal assets, such as your house. There are also guarantee credit lines that require you to provide personal guarantees or business liens.
If your company is a new company with low sales and no established corporate credit score, it may be easier to obtain a secured credit line. Just make sure you don’t pledge any collateral you don’t want to lose.
Unsecured credit lines do not require collateral, but usually require annual income, higher business and personal credit scores, and longer business history.
This proof of success helps convince the lender that you will be able to repay the money. Even if your business is eligible for an unsecured credit line, you can apply for a secured credit line.
That’s because unsecured credit lines tend to charge higher interest rates and provide lower credit lines. You may wonder why business owners get credit lines instead of loans.
There are some key differences between commercial loans and commercial credit lines.
The line of credit is revolving credit, while commercial loans are installment credit. After the loan application is approved, you will receive a lump sum, and you must immediately start regular monthly payments-even if the money is only deposited into your bank account.
When you pay off the loan, the account will be closed. If you want more money, you must apply for a new loan. Commercial loans are usually limited to certain purposes, such as purchasing equipment or real estate.
On the other hand, the credit line can be used for any commercial purpose you want. Commercial credit lines are usually smaller than loan lines, with a maximum amount of approximately $250,000.
Who Qualifies for a Business Line of Credit?
Since banks are generally reluctant to issue small loans, credit lines may be easier to obtain.
Who is eligible for a credit line? The documents required to apply for a business credit line may vary slightly, depending on the lender you want to contact and how much money you want.
However, in general, you need to provide the following information: Personal and business tax returns: This helps provide proof of your business income.
Bank account information: Some online lenders require you to provide access to your business bank account so they can verify your financial information.
Commercial financial statements: The lender wants to see proof of your annual income and other sources of income to ensure that you have sufficient financial resources to repay the line of credit.
Basic personal identification information: your social security number and identity. Basic business identification information: may include your employer identification number (EIN), business name, business entity type, business address, and business license or permit.
Current debt schedule: If your business already has outstanding loans or other debts, the lender will want to view your monthly payment commitments.
What credit score is used for the business credit line? The lender usually considers your personal credit score and business credit score when considering your application for a commercial credit line.
What Credit Score Is Used for a Business Line of Credit?
The three major commercial credit bureaus (Dun & Bradstreet, Experian, and Equifax) collect information about your business from your suppliers and suppliers, banks and lenders, public records, and other sources to build your business credit report.
The information in these reports is also used to create corporate credit scores. Three commonly used corporate credit scoring models are Experian Intelliscore Plus, D&B Paydex scoring, and the Small Business Scoring Service (SBSS) used by FICO.
Each commercial credit scoring model works slightly differently and can be used for different purposes, such as assessing loan risks.
The use range of the D&B Paydex score and Experian Intelliscore Plus model is 1 to 100, and the use range of the SBSS score is 0 to 300. The lower the score, the higher the risk.
Your personal credit rating may also be a factor in your business credit line, especially if you are a sole proprietor or a relatively new business but no business credit history.
Before you start researching credit limits, please check your personal credit report and score to check your credit status. Different lenders have different minimum credit scoring standards, and you must meet these minimum credit scoring standards to obtain a business credit line.
However, in most cases, you will need to obtain a personal credit score of 580 points or above, or at least “fair” in the FICO®Score☉ scoring model. If your credit score is at the low end of the rating, you may pay higher fees for your credit line and ask for more collateral, not whether your credit score is good or bad.
You can start by establishing a company or limited liability company (LLC) to separate your business and personal identity, opening a corporate bank account in your company’s name, and asking your suppliers and suppliers to report your payments to these three companies to start to Establish a credit reporting agency for corporate credit history records.
Obtaining a business credit card and paying your bills on time will also help improve your business credit score; just make sure that the credit card issuer reports to the business credit bureau.
Where can you get business credit? You can obtain credit lines from various sources, including banks and online lenders, and through the Small Business Administration (SBA). This is a close look at each of the advantages and disadvantages.
Traditional banks: Compared with online lenders, banks usually have stricter loan requirements for credit lines. For example, they may need more documents, expect to see a higher credit score, and take longer to approve the credit limit.
Cost: Banks usually offer lower interest rates, more favorable terms, and larger credit lines. Your current commercial bank may be a good place to start researching credit lines; just make sure to shop around and see what other lenders also offer.
Online lenders: There are many places where you can apply for commercial credit lines online. These include online lending markets that match businesses with lenders and direct online lenders who make loans directly on their own.
Both types of online lenders generally have a faster and simpler application process than banks. For example, they may pay more attention to your cash flow than financial statements.
They also tend to be more flexible than traditional banks in terms of approval criteria, so there are smaller credit lines that cannot be obtained from banks.
Where Can You Get a Business Line of Credit?
Newer companies may want to try this option. Remember that online lenders usually charge higher interest rates than banks. SBA: The SBA CAPLines program provides four credit lines: seasonal credit lines, working capital credit lines, credit lines for builders and contractors, and credit lines for subcontractors.
You must meet the criteria of SBA’s 7(a) loan program to be considered for any of the credit lines. The SBA itself does not issue credit lines; instead, it can work with approved lenders.
SBA guarantees a certain percentage of credit lines, making lenders more willing to extend credit to small businesses. Obtaining assurance is not easy: this option is best for businesses that have reliable records and can provide reliable financial records.
Using a Business Line of Credit to Grow Your Business
Use business credit lines to grow your business Before applying for a commercial credit line, please check your commercial credit report and personal credit score, which can help you determine whether you are likely to be approved.
The higher your score, the better your chances of obtaining a credit line from a lender with strict standards (such as a bank). If your scores are on the low end of the score, you may need some time to improve them or try to work with online lenders.
Obtaining, using, and repaying business credit lines on time can help new businesses establish business credit scores, which will make it easier to obtain other types of financing as the company grows.
Just make sure that the lender reports your payment to the three major commercial credit agencies: Dun & Bradstreet, Experian, and Equifax.
Using Experian’s credit monitoring service, Business Credit Advantage can help you master your company’s credit history and credit score, which are two key factors for your company’s financial future.
