Need financing for your small business? A small business line of credit might be the solution you’re looking for—without amassing a significant term loan debt. A small business line of credit gives small business owners a flexible financing option with a more straightforward application process.
Here’s what you need to know about a small business line of credit.
Small Business Line of Credit Defined
Similar to a small business credit card, a small business line of credit is a type of financing called “revolving” credit that gives borrowers access to a lump sum of money to draw upon when needed and then pay it back over the loan terms. In addition, the small business is preapproved for a specific credit limit and makes payments (plus any interest and/or fees) on the amount drawn. Then, once you repay what you withdrew, there is nothing to pay until you make another withdrawal.
A small business line of credit differs from a traditional bank loan in several ways, including the application process and organization of payments.
To apply for a business line of credit, you’ll typically have to supply the following documentation, although this varies by the lender:
- Recent business tax returns
- Recent personal tax returns
- Bank account information and bank statements
- Financial statements (balance sheet, income statement)
- Federal Tax Identification Number or Employer Identification Number (EIN)
- Social Security Number
- Business entity type (sole proprietorship, partnership, corporation, limited liability company)
- Past loan documentation
To apply for a business loan, you’ll likely need all of the above, plus:
- Updated business plan
- Personal and business credit history
- Collateral or a personal guarantee
- Blueprint or renovation plans (if applicable)
- Purchase orders and contracts to show what the loan is for (if applicable)
In addition, to qualify for a traditional term loan might also require a company to be in business for a minimum number of years and/or have annual revenue minimums.
Traditional business loans are “installment credit” financing. Like a small business line of credit, the loan is given to the borrower in one lump sum. However, fixed monthly payments are required (including principal and interest) until the entire loan is paid off. Unlike with a small business line of credit, a new loan application must be processed and approved for the small business owner to access more funding.
When small businesses need funding quickly, the speed of the application process is a vital consideration. While a traditional loan may take weeks or months to obtain the money, small business lines of credit (especially from online lenders) can take as little as 24 hours.
Finally, there are two types of small business lines of credit to know about: secured and unsecured. Most small business loans and some small business lines of credit require collateral or personal guarantees for approval. Secured loans mean the borrower has offered assets, such as property or equipment, in case of loan default. A personal guarantee works the same as collateral but requires the borrower to put up their personal assets for insurance.
On the other hand, an unsecured business line of credit requires no collateral to insure the loan. Instead, approval may depend on different qualifications, such as being in business longer or better credit scores.
Can you Use a Business Line of Credit for Anything?
Unlike small business loan requirements, rarely does a small business owner need to offer a specific purpose or project to qualify for a line of credit. As long as the money is spent for business purposes (which is recorded on your small business’s tax return), the use of a small business line of credit is at the owner’s discretion. If the company is structured as a corporation, the line of credit application and use must be approved by the board of directors and be recorded in a board meeting.
3 Uses for a Small Business Line of Credit
The main reason to apply for a small business line of credit is to have access to a short-term funding source when you need working capital but may be caught short. You may need money for operating expenses like utilities, office supplies, and payroll or opportunity costs, such as purchasing inventory or upgrading equipment.
Use #1: Seasonal Cash Fluctuations
If your small business experiences seasonal ups and downs, a small business line of credit can be a simple solution to help you bridge the gap until sales pick up. Cash flow is not always predictable, especially during periods of economic uncertainty. Paying bills and employees are regular expenses you must pay no matter your business’s cash flow status, so having a small business line of credit to draw on can keep you out of hot water and not hurt your personal credit score or the business’s credit score.
Use #2: Day-to-day Business Expenses
The daily operating expenses for small businesses add up quickly. Spending on things, such as utilities, office supplies, telecommunications, transportation, etc., plus web designers, technical support, and more, help your business run smoothly. But what will happen to your business if you can’t pay those bills? Or, if you’re waiting for a large invoice to be paid, a small business line of credit can help keep your business running until the money comes through.
Use #3: Opportunity Expenses
Then there are the unexpected opportunities that arise when running a small business—opportunities too good to pass up. It could be a new project requiring new equipment or a timely marketing campaign. However, if cash is needed upfront and you don’t have enough funds, the opportunity could slip through your fingertips. A small business loan takes too long to get funded, and credit cards have sky-high interest rates. Having a small business line of credit as a backup emergency plan is a smart tool that keeps you on the right financial path.
Need a Small Business Line of Credit? Contact Financing Solutions Today!
Financing Solutions is an alternative lender offering an easy application process (it takes less than two minutes to fill out) and requires no collateral or documentation for a written offer letter. Other alternative lenders have a much longer application process and may be more expensive.
The founders of Financing Solutions have started and grown several companies together; therefore, they understand how important it is to keep costs low. That’s why we don’t charge you to set up the credit line and don’t charge maintenance fees. We don’t ask for personal guarantees, and applicants can receive a no-obligation offer letter the same day. We make approval decisions based on our decades of experience working with small businesses. Find out today why we have five-star ratings from the Better Business Bureau and Google. Highlights of our small business line of credit include:
- There are no costs to set it up or keep it in place
- The easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you have the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
A small business line of credit is a good funding resource that’s available whenever your company needs it, without the heavy burden of term loan requirements. If you want to see if your small business would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.