Frequently Asked Questions About Business Credit Lines
What is a business line of credit?
A business line of credit is sort of like a credit card for your business; you apply for a line of credit and are approved up to a certain limit. You can then access the line of credit as and when you need to, and you only pay interest on what you actually borrow.
How is a line of credit different from a business loan?
A line of credit differs from a business loan in a few ways. A line of credit is open-ended, so there is no term limit. There is a cap on a line of credit which dictates the maximum amount you can borrow, but you can borrow any amount up to that cap, as and when you need to – as opposed to a business loan, where you receive a set lump sum immediately and then have to pay it back by a certain date.
What are the requirements for a line of credit?
Many traditional lenders, such as banks, will require a solid credit history and comprehensive business information before approving a line of credit. Some lenders have less strict requirements and may be willing to lend to newer businesses that don’t have a history, or to those with lower credit scores, but they may charge higher interest rates to offset these risks.
What do I need to apply for a line of credit?
You need some documents to apply for a line of credit; these vary from lender to lender but usually include standard business documents and financial documents – such as a few years of financial statements, business incorporation information, bank statements, business license, and ownership information.
What’s the cost of a line of credit?
Lines of credit come at a price; primarily this consists of the interest you pay on what you borrow. Interest rates vary lender to lender. There are also usually fees, including transaction fees for each draw on the line of credit, annual fees, and set up fees.
How long does a line of credit last?
Most lines of credit are open-ended and have no set end date. However many lenders include a stipulation in their terms that allows them to cancel the line of credit at their discretion, in case circumstances change.
Why do people use lines of credit?
Lines of credit are popular because they are a convenient and flexible form of financing that can also be quite cost-effective if you stay on top of the interest. They allow for ad hoc borrowing and so can be used in many situations.
What can I use a line of credit for?
Lines of credit can be used for almost any business expense, such as inventory purchasing, equipment repair costs, working capital, financing campaigns and bridging cash flow gaps.
What are the risks of a line of credit?
Lines of credit are sometimes considered risky if they are not used sensibly. It is easier to get carried away when drawing on a line of credit, as it is such a convenient form of ready funds, and so can encourage reckless spending. Interest payments also become expensive if you allow them to build up without paying off the balance.
How much can I borrow with a line of credit?
Lines of credit tend to be smaller than standard business loans; most range from $10,000 to $100,000, although larger amounts are available to more established or profitable businesses.