How a Small Business Line of Credit Can Be Acquired: A Comprehensive Tutorial
Overview
Hi there, readers! As a small business owner, do you need an uncluttered way to finance your business operations? You’re in luck, we will be covering exactly how small business lines of credit work.
This is designed to guide you from the preliminary stages to the final outcome of receiving your credit. Regardless of the phase you are in, a line of credit enables financial expansion for your business, so long as it is used responsibly.
The Basics of Small Business Lines of Credit
A small business line of credit allows the business owner to have funds at their disposal at any given time. This works similarly to a credit card, with the only difference being that it is specifically designed for businesses. The amount of money a borrower can take varies and they also won’t have to pay interest on money they haven’t utilized.
How Small Business Lines of Credit Are Advantageous
- Variation: A line of credit allows unrestrained access to funds which can be repaid at a convenient scheduled time.
- Low interest rates: Compared to other business loans, business lines of credit have low rates of interest.
- Build business credit: By consistently paying off your line of credit on time, you can increase your business credit, which can be very useful for future loans.
Small Business Line of Credit Application Procedure
1. Prepare Your Documents
Documents required before making the application include:
- Business plan
- Financial statements
- Tax returns
- Business license
- Credit report (for certain lenders)
2. Select Your Lender
Many lenders offer lines of credit to small businesses, so take your time looking around. Look for lines of credit that have lower fees and interest charges, as well as manageable repayment schedules.
3. Fill Out The Application
Fill out your details and submit your application. Most lenders ask you to complete an online form and upload your supporting documents.
4. Approval
As soon as the review has been completed, you will be contacted with their decision. If successful, you will be presented with a credit agreement, which you should read carefully before signing.
Factors that Affect Your Application
- Business credit score: Having a good credit score for your business results in high chances of approval and reduced interest rates.
- Financial health: Lenders will assess the financial health of your business using your financial statements and tax returns.
- Collateral: To mitigate risks with the line of credit, a few lenders may ask you to furnish collateral such as properties or machines.
- Business plan: Your ability to manage your business and repay the loan can be shown with a solid business plan.
Table: Top Providers for Lines of Credit for Small Business Comparison
| Lender | Interest Rates | Fees | Repayment Terms |
|---|---|---|---|
| Small Business Administration (SBA) | 5-10% | $0 | 5-25 years |
| Wells Fargo | 4.5-10% | $0-$500 | 1-10 years |
| Chase | 5-12% | $0-$1,000 | 1-5 years |
| Bank of America | 4-10% | $0-$500 | 2-12 years |
| Kabbage | 6-24% | $0-$95 | 6-24 months |
Conclusion
Obtaining a small business line of credit is as easy as pie. Adhering to the steps provided in this guide increases the chances of approval and securing favorable terms for a business.
Before you go anywhere, please take a look at articles related to financing small businesses and many other subjects that will help you run your business effectively.
Some Questions Relating To Application for Small Business Loans
What is a small business line of credit?
This type of credit allows for borrowing against a limit, incurring interest charges only on the amount drawn, as with a credit card. A small business line of credit is a flexible loan that allows you to borrow up to a certain amount of money whenever you need.
What is the difference between a line of credit and a loan?
With a line of credit, the borrower is given more flexibility because it can be used several times and the payments can be paid over a stretched duration unlike with a loan. Loan refers to a single sum of money disbursed to a borrower that is expected to be paid back within a defined period of time.
What can a business line of credit be used for?
Purchasing inventory, expansion of operations, or catering for unexpected costs are all business expenses that can be financed through the line of credit.
What do I need for a line of credit?
Most lenders consider the business’s revenue, credit history and time of operation but requirements for eligibility differ from one lender to another.
What documents do I need to apply for a line of credit?
Commonly requested documents are business revenue, individual financial statements, and a tax return for the business.
What are the interest rates on lines of credit?
Interest rates differ depending on your credit score and the conditions set by the lender.
Are there fees associated with a line of credit?
Some fees relating to credit lines are possible, including, but not limited to, application fee, annual fee, or a fee for not utilizing the credit line.
How long does it take to apply for a line of credit?
Depending on the lender and how complicated your application is, expect to complete the application process in one to four weeks.
What are the advantages of a line of credit?
In addition to providing easy access to capital when necessary, lines of credit help businesses with cash flow.
What are the disadvantages of a line of credit?
A line of credit comes with its fair share of fees and charges, for example monthly interest and additional fees, which makes it costly. In turn, it also requires more active management which can result in overdraft fees.