Why Would a Business Need a Line of Credit?

 

Owners often seek out a line of credit when they need access to capital to fund their businesses. This form of financing is flexible and can supply firms with working capital when revenue is tight.

Lines of credit are typically affordable compared to other financing options; however, securing one can be challenging. Many have hefty collateral requirements, and most are challenging to obtain. For many business owners, this hurdle represents an obstacle few businesses can clear. Let’s look at why a business needs a line of credit and a financing alternative if you don’t qualify.

Reasons a Business Might Need a Line of Credit

Gaining access to short-term funding is the main reason company leaders seek out a line of credit. Most firms use this money to bolster financing for operational expenses. These expenses can include:

• Covering payroll
• Purchasing supplies
• Increasing inventory
• Off-season working capital for companies with cyclical business models
• Covering expenses when your business is rapidly expanding

Some business owners may feel they can use a line of credit to improve their methods for managing cash flow. Business owners can draw funds from their line-of-credit using a mobile app, small business credit card, or their company checking account, making money easier to track. Unlike a small business loan, a line of credit is not earmarked for a particular purchase or purpose.

More About Lines of Credit

Sometimes referred to as a personal line of credit or a bank line, a line of credit is an account you can open with a financial institution that allows you to borrow cash when needed, up to a predetermined limit.

Lines of credit can be used like a credit card, where you pay interest on borrowed money and, as you pay it back, your available credit is restored. A line of credit typically carries a lower interest rate than a credit card; however, your credit score needs to be in great shape.

Some banks offer smaller lines of credit as unsecured debt, which means it does not require collateral backing. These are available for sums ranging from $10,000-$100,000. For larger amounts, greater than $100,000, one of two things are needed: hard collateral and cash flow—and you often need both.

Finance companies want to ensure they will be repaid; therefore, they make it challenging to obtain lines of credit, even those backed by the Small Business Administration (SBA). Banks and credit unions usually only lend to firms with:

• A minimum of two years in business—Lenders need to see that your company has longevity and experience. They may be able to issue a line of credit to your startup company if you can provide solid collateral, a personal guarantee, and good personal credit history.
• Collateral—Many lending institutions and banks only offer lines of credit to businesses that can put up collateral to secure the loan. Collateral is any asset type the lender can use to repay the loan if the borrower defaults. Lending institutions usually use inventory, machinery, accounts receivable, and real estate as collateral resources. Lenders will often use a UCC (Universal Commercial Code) lien to secure the collateral, giving them collection priority.
• Profits and revenue—To be approved for a line of credit, lenders require that your firm be profitable and have revenue. Banks look at your income as their primary way of getting repaid; therefore, your profits and revenues need to warrant the line of credit size. If your company is unprofitable or has no income, it cannot get a line of credit unless it can be guaranteed with collateral.
• Personal guarantee—A personal (or corporate) guarantee is a legal promise to pay back the line of credit issued to your company. If your company cannot repay the debt, then you become personally responsible for the balance.

Financing Alternatives that May Be Easier to Obtain

Since 2008, fewer new businesses can acquire large lines of credit even with SBA backing. A few companies may find particular startup loans, or other lenders or small banks may extend special business deals. Generally, though, financial institutions are more interested in presenting bank lines to hugely profitable companies.

Thankfully, there is a better financing option available with line-of-credit benefits and fewer qualification restrictions.

The Revenued Business Card

The Revenued Business Card is a dynamic new financing tool that empowers you to grow your business while ensuring your day-to-day operating costs are met. The Revenued Business Card can be used to cover payroll, purchase supplies, boost inventory, provide working capital for firms with cyclical businesses, and cover the additional expenses that come with expansion.

If you have poor credit and your business has been operating for less than two years, has no collateral, and is not profitable, a line of credit is likely not possible for you.

The Revenued Business Card can fund your business with:

A minimum of six months in business—Six months is plenty of time for our underwriters to get an idea of your sales strength and banking activity.
No collateral—Revenued does not loan cash or issue a credit line; therefore, collateral is not required. It is a unique alternative financing solution that provides access to a pre-set spending limit based on your company’s future sales revenue.
$10,000 per month in sales—To qualify for the Revenued Business Card, your company needs to bring in a minimum of $10,000 in sales per month. This modest figure assures us that you can make your funding payments.
Poor or no credit—To qualify for a business line of credit, you generally need a minimum FICO credit score of 680. We understand that this may not be possible for new entrepreneurs or company owners pushing through a difficult time. Because Revenued Business Card underwriting is based on your sales and banking activity, you can have a subprime score and still qualify.

Additional requirements include:

• Having a business bank account
• Having a minimum of $1,000 per month in your account
• Not having your bank account dip into the red more than three days in a month
• Your business may not be associated with the financial or banking industry