And there are dozens of ways you can try to access that funding — from SBA loans to equipment financing to cash advances. Options are endless… and confusing.
How do you decide whether it’s worth investing the time and effort to get approved for a business line of credit?
In this article, we’ll cover:
First, a definition:
Unlike a typical loan, where you take out a bulk sum of money, and repay it on a schedule, a business line of credit gives you access to a sum of funds that you can withdraw as needed — and you only pay interest on what you use.
The purpose of a business line of credit is to give you access to a “flexible” financing option.
How is it unique? The flexibility. A business line of credit is often described as a “revolving” loan, meaning the outstanding money goes up or down depending on your agreed-upon borrowing base. Most lenders will reassess how much you can get weekly, sometimes monthly or daily.
As your business grows and your stability or collateral increases, your line of credit will often increase with it.
Here’s a quick chart showing you the pros and cons of a business line of credit, as compared to other funding options like term loans, credit cards, factoring and cash advances.
Explore how other funding options work here →
Borrowing funds just as needed helps you control interest expenses
Unlike credit cards or other short-term financing, business lines of credit offer lower rates
Funds replenish as you pay back, giving you long-term access to money as needed
Helps you build a long-term relationship with your banker, and lets them get to know your business
It’s a safety net in a pinch, if there’s an unexpected expense or dip in revenue
Your line of credit often grows with your business, as you build trust and stability
As a small business, lenders may need you to provide business collateral, or risk your personal collateral, like your home, to secure credit.
As a small business, you may not meet stringent requirements, or only be approved for a very minimal amount
Easy access to capital increases your risk of accumulating debt, which could be challenging to pay back
An extensive amount of paperwork is needed, and it takes at least 3 months to be approved
Although interest rates are lower, business lines of credit come with high fees — like origination, maintenance, or even early termination fees.
Bear in mind: business lines of credit impact your business’s credit score.
As long as you’re borrowing responsibly and paying back on time, your credit score will benefit. But of course, missed payments or overborrowing will hurt your credit score. That will mean that securing financing in the future will be difficult.
If you’re in a non-profit, or can’t qualify for a business line of credit right now, don’t put your business growth on hold.
Here are some creative alternative funding sources out there.
Morris Reichman is the founder and CEO of Payro Finance. Former Vice President at Infinity Capital Funding an alternative finance company, Morris possesses a versatile background in the finance industry. Having spent 7+ years working across global macro operations and start up corporate finance Morris's expertise is in business accounting, risk management and investment analysis. Morris founded Payro Finance to support business owners and ensure their business continuity.