A small business line of credit is a great way to ensure you have cash on hand when you need it, helping you weather unexpected expenses or changes in cash flow.
What exactly is a small business line of credit?
A small business line of credit functions like a business credit card — It gives you access to funds up to your credit limit that you can pay back over time if you use them.
Unlike a small business loan that pays out a lump sum up-front with a pre-established repayment plan, a line of credit gives you the flexibility to only use the cash (and be obligated to repay it) when you need it.
While business credit cards offer some of the same benefits as a line of credit, they are typically better suited for smaller, recurring expenses and less-established businesses. While a business line of credit won’t get you any rewards, it will give you access to a higher credit limit, typically with fewer fees and a more agreeable APR.
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How do you establish a business line of credit?
To be approved for a business line of credit, you’ll need to reach a few metrics in your business. While every lender has its criteria, general guidelines suggest:
- A minimum of 6 months in business
- Annual revenue over $25,000
- A personal credit score above 680
Today, there are plentiful lender options for obtaining a business line of credit, including traditional banks and online offers. Online lenders can be a good option for businesses that may not meet suggested guidelines, but they typically also charge higher fees.
Plan ahead and have a clear picture of your fiscal year when deciding when to apply for a business line of credit. Lenders are more likely to approve you if you apply when your business’s cash flow is strongest.
Note: Before you apply to every option you can find, remember that each application will require an inquiry on your credit profile, lowering your credit score.
How do you maintain a small business line of credit?
Once you’ve identified a lender that works for your business and successfully applied, you still need to take steps to ensure your credit remains in good standing and will be there when you need it.
Just like any line of credit, you’ll want to make sure that you’re making payments on time and limiting your balance to keep it well below your credit limit.
Typically, it is not advised to use a line of credit to cover operating losses because they will be challenging to repay.
Pay your balances on time and use your credit line strategically, and you will enjoy the flexibility it gives your business. You’ll also be rewarded with a positive boost to your credit history, making it easier to apply for additional funds and grow your business in the future.
Is a small business line of credit right for you?
Only you can decide if a line of credit might be helpful in your business. They can be a great way to establish peace of mind that you’ll always have funding when you need it, but they may not be suitable for every business.
Take the time to go over your options carefully and consult a professional advisor if possible.
