Unlike term loans, where you get a lump sum of money and have to pay interest even on money that you haven’t used yet, lines of credit (LOCs) offer flexible funding.
When you need cash, you can easily withdraw up to a certain limit and pay interest only on the amount you withdrew. Then as soon as you pay back what you borrowed, the full amount becomes available to you again.
It is no wonder, then, that lines of credit are one of the most popular choices among business owners seeking additional capital.
Lines of credit have also evolved over the years. Banks are no longer the only place where you can get them. Below are 4 lines of credit now available to small businesses.
Conventional Lines of Credit
A traditional LOC is usually offered by banks, and it is harder to get than the other three types. Also, this is usually available only to experienced entrepreneurs with established businesses.
Conventional LOCs usually have higher credit limits, longer repayment periods, and lower interest rates compared to the other types, but they require higher credit scores and business revenues.
These LOCs have lower credit limits and higher interest rates.
However, they typically also have less demanding requirements, as well as faster turnaround times. Thus, more businesses (including younger ones) can qualify and get flexible funding they can use for their operations.
Unlike conventional LOCs, short-term LOCs are mostly available from alternative lenders and not from banks.
These LOCs are backed by valuable assets, specifically by business equipment, such as vehicles and manufacturing machinery. If the debtor fails to pay back the money borrowed, the lender will claim the equipment.
Because these LOCs are backed by collateral, it is easier for borrowers to qualify for a credit line. The lenders are more interested in the value of the assets pledged by the borrower than his credit history.
This type of LOC is similar in concept to invoice financing, where borrowers can sell outstanding invoices to get a percentage of the invoice total as a cash advance.
However, instead of getting an advance as a lump sum, the invoice value determines the credit limit you get from the lender. Therefore, if the value of the invoices increases, the credit limit also increases.
Interested in getting a business line of credit but not sure where to start? You can check out 4 of the most popular alternative lenders that offer them.
Kabbage offers a credit limit of $250,000 and 6-, 12-, or 18-month terms. There are no prepayment penalties or origination fees. In addition, the borrower is not required to use the funds unless he needs it. There won’t be any charge until he withdraws money from the pool.
To qualify, the business has to be at least a year old, with an annual revenue of $50,000 or a monthly revenue of $4,200 in the past three months.
To apply, the borrower only has to enter basic information about his business then connect his revenue data online or via Kabbage’s mobile app.
BlueVine, meanwhile, offers revolving lines of credit up to $250,000, with interest rates as low as 4.8%.
There are no fees to open or maintain the LOC. There are also no prepayment penalties or account closure fees.
Application is a breeze and you can get approved in as little as 5 minutes.
Payments are fixed — weekly or monthly — for 6 or 12 months.
To qualify, you need a FICO score of at least 600 and your business has to be at least 6 months old and earning $100,000 per year.
OnDeckoffers lines of credit ranging from $6,000 to $100,000. Interest rates start at 13.99% APR and there are no prepayment penalties.
The application process is simple and takes less than 10 minutes. A loan advisor will contact the applicant in as fast as one day to finalize the details and the funds will be in the borrower’s bank account within 24 hours.
Rapid Finance (previously called Rapid Advance) offers a wide variety of business financing solutions. Their lines of credit range from $5,000 to $500,000, with automatic daily or weekly payments for 3 to 18 months.
Application is online or through a dedicated business advisor. Borrowers need to present a government-issued photo ID (such as a driver’s license), a voided check from the business checking account, and three months of business statements.
It is easy to see why business owners are attracted to lines of credit — lines of credit act as flexible safety nets that allow entrepreneurs quick and easy access to just the right amount of additional capital without them having to pay interest on any idle funds.
Whether your company is already established or is fairly young and small, you have a chance to get capital from this funding option.