Lines of Credit Fuel Small Businesses

Secured or unsecured business lines of credit help maintain capital flow

What Are Business Lines of Credit?

A business line of credit is a revolving credit facility that allows you to draw funds as you need them. It’s an account with a set amount of funds available — the amount is determined by your lender based on your business profile and lender criteria.

When your business needs an influx of cash for payroll or inventory purchases, for example, you can draw money from the account, spend it as needed, and pay back the money on a set schedule, generally monthly. Businesses draw as much or as little cash as they need, up to the credit limit, and re-payment depends on the amount taken in a given time period.

The flexibility these accounts offer can help businesses with cash flow issues during seasonal ebbs and flows.

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Term

Revolving credit facility

Time to Fund

1 to 21 days based on line type

Collateral

Not required, but can be used

Types of Business Lines of Credit

There are three types of business lines of credit — secured, traditional unsecured and nontraditional unsecured. Which business line of credit to choose depends on your small business credit report and the amount of collateral that can be placed against the loan.

Secured

With secured business lines of credit, businesses place collateral against the line, typically in the form of short-term assets such as invoices or inventory. Options include secured lines from private institutions or federal CAPLine lines of credit. Secured lines are ideal for financially reliable companies willing to place collateral against a loan or for fledgling companies that qualify for specific CAPLines programs.

Traditional Unsecured

Traditional unsecured business lines of credit have no collateral requirement. Consequently, they carry more rigorous qualification conditions and annual reviews. Traditional unsecured lines are ideal for well-capitalized companies that can afford the time and cost of application.

Nontraditional Unsecured

Nontraditional unsecured lines typically take the form of a business credit card. Although they are relatively easy to obtain, interest rates can be high, depending on the creditworthiness and liquidity of the business. Nontraditional unsecured lines are ideal for businesses with little time in business and no established credit.

Business Loans vs. Lines of Credit

Business Loans

  • Fixed term and set payments
  • Usually fixed interest rates, higher than lines of credit
  • Best for single, planned large expenditures

Business Lines of Credit

  • Revolving credit facility
  • Usually variable interest rates, paid only on capital drawn
  • Best for flexible, short-term capital requirements

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Eligibility Requirements and Fees

Compare the requirements and fees to know which business line of credit fits your needs.

Collateral

Secured
Required
Traditional Unsecured
Not required
Nontraditional Unsecured
Not required

Minimum Time in Business

Secured
Two years
Traditional Unsecured
Two years
Nontraditional Unsecured
Six months

Owner’s Credit Score

Secured
Not heavily weighted
Traditional Unsecured
At least 680
Nontraditional Unsecured
At least 600

Required Documents

Secured
Proof of business registration, business tax records, inventory statements, financial reports
Traditional Unsecured
Proof of business registration, business tax records, inventory statements, financial reports, bank account information
Nontraditional Unsecured
Typically none

Annual Review

Secured
Typically none
Traditional Unsecured
Yes
Nontraditional Unsecured
None

Fees

Application and annual fees may apply
Traditional Unsecured
Application and annual fees typically apply
Nontraditional Unsecured
Typically no application or annual fees

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Factors to Consider Before Opening a Business Line of Credit

Discuss the features of different business lines of credit with your lender to identify the best option for your company.

  •   Objectives and budget. Consider whether a line of credit makes sense for your business objectives, and if your revenue streams are enough to cover payments.
  •   Eligibility. Ensure that your business can demonstrate all eligibility requirements for the line of credit, both to open the line and sustain it annually.
  •   Credit limit. Check that the available credit limit is sufficient for your business’ needs or, if taking out a high-limit line, that spending will be managed responsibly.
  •   Time to fund. Confirm that the time needed to process the application and fund the line will be adequate for your cash requirements.
  •   Rates and fees. Compare offerings from different lenders to understand what interest rates are available to your business and whether they are affordable. Remember to factor in initial and annual fees.

Common Uses for a Business Line of Credit

  • Sustaining capital flow during seasonal lows
  • Keeping up with payroll and supplier contracts
  • Covering late client payments
  • Meeting unexpected short-term expenses

Opening a Line of Credit as a New Business

Small businesses that have not yet built enough credit to qualify for traditional business lines of credit may be eligible for nontraditional unsecured lines — business credit cards. These cards often also come with zero percent annual percentage rate for an introductory period.

Although the owner bears ultimate financial responsibility for the line should the company default, a nontraditional unsecured line allows a new business to build credit separately from the owner. If payments are responsibly managed and interest does not accrue, it can be a stepping stone toward establishing the credit and liquidity to obtain larger lines.

How Are Rates Calculated?

  • Small business credit report and/or owner’s credit score
  • Time in business
  • Liquidity
  • Available collateral

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CAPLines Program

The U.S. Small Business Administration’s CAPLine family of loans allows lenders to extend as much as $5 million to new and growing businesses through four programs:

  • Contract Loan Program
  • Seasonal Line of Credit Program
  • Builders Line Program
  • Working Capital Line of Credit Program

CAPLines are secured and easier to qualify for than traditional secured lines.

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