Businesses can use a business credit line to finance short-term expenses like payroll and inventory. Online lenders as well as traditional lenders provide business credit lines.
Like a credit card, a business line of credit lets you borrow up to a certain amount and pay interest only on the amount borrowed. Once this is repaid, you can borrow more funds.
A business line of credit differs from a traditional small-business loan, which requires a lump sum to be received and repaid over a set period of time, with interest. You can use a business line of credit to manage cash flow, buy inventory, or cover payroll.
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How does a business line of credit work?
A line of credit for a business works like a credit card. You receive access to a set amount of capital – such as Rs.150,000 – and can borrow funds as you need them. You only pay interest on the money you borrow.
The funds are then repaid gradually over time, usually on a weekly or monthly schedule. To save on interest costs, you can repay your full balance early with most lenders. However, some lenders charge additional fees, such as:
- Origination fee: The cost of processing your application.
- Account maintenance fee: A charge you will incur in order to maintain your account and keep your business line of credit active.
- Draw fee: Fee charged each time you draw on your credit line.
- Inactivity fee: A lender may charge this fee if you don’t draw from your line of credit within a specified period of time.
As long as you keep paying on time and do not go over your credit limit, you can continue to draw on your credit line as often as you like. A business line of credit is revolving, so it’s more flexible than a business term loan that must be repaid over a fixed period of time.
Where to get a business line of credit
Banks and credit unions
There are several types of business credit lines that banks and credit unions can offer, including secured and unsecured lines of credit, as well as SBA lines of credit.
You must typically meet strict requirements to qualify for business lines of credit, even though these lenders offer competitive rates. Solid revenue and credit record, as well as several years in business, are likely to be requirements.
A bank or credit union may also require collateral to secure your credit line (especially if your limit is higher), and may charge additional fees, such as annual rates and inactivity fees when compared to online lenders.
The qualification requirements of online lenders, such as Ziploan, are generally more flexible than those of banks and credit unions. Some lenders will lend to new businesses and those with bad credit.
A small business line of credit may be issued within a few days by online lenders with simplified application processes and fewer fees. This type of lender may also charge higher interest rates and offer lower credit limits than banks.
How to apply for a business line of credit loan?
Getting a line of credit for your business is pretty easy from Ziploan. Simply download Ziploan App and:
- Sign up with your registered mobile number
- Fill in your basic details to check your loan eligibility
- Get a real-time conditional offer based on your PAN & Aadhaar Card
- Upload a few documents – Address proof, Bank statement & ITR
- Now track your loan application status on an app for approval
- The loan application is approved and money is transferred directly to your bank account
How to get a business line of credit
An online marketplace can help you compare offers from multiple lenders at the same time if you apply with an online lender, a bank, credit union, or an online lender.
Lenders differ in terms of interest rates, borrowing limits, and qualifications.
You will need to provide financial documentation, such as your personal credit score, your annual revenue, the period of time you have been in business, as well as your business credit score. You may also need:
- Business tax returns.
- Business bank statements.
- Business financial statements (e.g., profit and loss statement or a balance sheet).
Secured vs. unsecured business line of credit
Collateral is required for a secured business line of credit, such as inventory or property. Lenders may seize your assets if you fail to repay the credit line.
In contrast, unsecured business credit lines don’t require collateral, but some lenders may still request a personal guarantee or a lien on a business’s assets.
If you default on a loan, your personal assets, such as your house, can be seized by an insolvency court. If you haven’t repaid a loan, a lender can seize your business assets.
Compare lenders to find the one that works best for your business and ask whether they require collateral, a personal guarantee, or alien.
Business lines of credit vs. business credit cards
Credit cards for businesses are technically lines of credit, but they differ in several ways from traditional lines of credit.
When you take cash out of your business line of credit, you receive actual cash in your bank account. A business line of credit has a higher credit limit and may be backed by collateral. A business credit card can be used to get cash, but you’ll have to pay a fee (called a cash advance fee) and a higher interest rate.
Traditional lines of credit do not provide rewards or cashback for spending – something that credit cards can provide. Rewards are often related to expenses for the business, such as office supplies, gas, internet, and cable. Additionally, you may be able to sign up for a card offering 0% interest for a certain period.
Small and new businesses do best with business credit cards, while medium and larger businesses do well with business lines of credit.