What is a business line of credit?
It’s a secured or unsecured line of credit a business uses to fund growth or pay down debt.
It’s a revolving line of credit, meaning that however much you have already borrowed, you can always borrow more – up to your limit.
A business line of credit functions much like a credit card, except that the terms (interest rate, debt limit) are often better. However, many lenders require a solopreneur to be in business anywhere from 6 months to 2 years before applying for the loan.
How to use a line of credit
A business line of credit for a new business is an effective way to address any number of needs, including:
- Increasing your purchase power, financing growth, and driving revenue.
- Financing short-term expenses with a line of credit rather than a credit card. You will pay less interest and have a longer window to repay the loan.
- Using a line of credit for a new business to improve your cash flow during less-busy times, especially if your business is seasonal.
- Stocking up on inventory. Instead of paying for inventory with revenue, use the credit to keep your business humming.
- Preparding for unknown eventualities. The Covid-19 pandemic showed us that businesses have to be prepared. Business lines of credit for new businesses can serve as a rainy-day fund in times of need.
Best business lines of credit for new businesses
There is no shortage of options in this area, with big banks and online lenders both offering lines of credit for new businesses.
The big difference is that traditional banks and credit unions impose stricter requirements on the borrower. For instance, a bank might ask for a strong credit history and a few years in business before offering a credit line.
An online lender will typically have a fewer number of fees (for instance, origination, account maintenance, inactivity, and draw fees) but their interest rates may be less competitive than banks.
Get your paperwork in order
Before applying for a line of credit for a new business, small business owners should consider the following factors to get the credit that best suits their business.
- How much funding do you actually need? You’ll want to estimate the maximum.
- How good is your credit score? The better your score, the more favorable your terms.
- Research the most appropriate lender. Maximum credit limits, repayment terms, and interest rates are a few of the essential items.
- Make sure your documents are in order. You’ll need personal and business tax returns, bank statements, and a profit and loss statement – at the very least.
A business line of credit for a new business can be a lifeline in the early stages and a reliable source of funding when business is slow or an investment opportunity comes your way.
Best yet, the process is uncomplicated and some lenders will fund your account on the same day. A business line of credit is a great way to keep your business well funded and prepared for any business blip.
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