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How to Choose the Right Business Line of Credit
February 05, 2019
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How to Choose the Right Business Line of Credit

A business line of credit can be an excellent resource for entrepreneurs who find themselves needing cash in a pinch. That may be to cover emergency expenses, have additional working capital on-hand, or take advantage of growth opportunities on short notice.

As with any kind of loan, however, receiving a line of credit comes at a cost. Before applying, it’s crucial to consider how much money your business needs, if you’ll be able to meet the repayment terms, how it’ll affect your operations. In this post, we’ll explain a few factors to consider before applying for a business line of credit, so that you can be well-prepared!

What You Should Consider Before Selecting a Business Line of Credit:

1. Secured vs. Unsecured Lines of Credit

If you’re considering a line of credit to sustain your business, you’ll first need to determine if you want a secured or unsecured line of credit.

To apply for a secured line of credit, you must submit some form of collateral that the lender can seize if you’re unable to fulfill your financial obligations. This collateral could be real estate, equipment, or inventory, just to name a few examples.

If you’re a new business, this might not be possible. Or, you might not be willing to risk having this collateral seized if you can’t repay your balance. However, a secured line of credit can be easier to qualify for, especially if your credit scores are low.

In comparison, an unsecured line of credit won’t require collateral, but this makes it more difficult to qualify for. The lender will likely consider your business’s annual revenue, personal credit, and business credit. If you’re unsure of what your credit scores are, you can view your business credit report through Experian, Equifax, and Dun & Bradstreet, while personal credit scores are ran through Equifax, Experian, and TransUnion.

2. Interest Rate

The most important aspect when weighing loan offers is cost. Interest typically starts to accrue as soon as you borrow against the line of credit limit. That means you should pay extra attention to the APR that the lender is offering.

Some small business owners may be eligible for a line of credit backed by the U.S. Small Business Association through its CAPLine lending program. As with all SBA lending programs, interest rates on CAPLines are capped at a set percentage above the prime rate. Still, it’s important to note that SBA loans are typically available only to moderately established small businesses that have exhausted all other financing options.

3. Amount

The amount you intend to borrow against the line of credit should also be a factor in whether to accept an offer. In fact, your business may need a different financing product entirely, such as a term loan, cash advance, or credit card. For example, if you intend to borrow a large sum that you don’t expect to pay back quickly, a small business loan could be a cheaper option.

Ultimately, it’s important to consider how much money your business needs. While it might be enticing to pursue a higher credit limit, if your business truly doesn’t require it, it could be a detriment to your business. When people have access to excess financing, they can be tempted to overspend.

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4. Loan Terms

Before accepting an offer, you should find out how often the lender requires payment. Often called a clean-up requirement or pay-down provision, the lender may have a policy that requires you pay your balance down to zero for a short period of time (typically monthly payments) at least once a year. Not all banks have this condition, however. If this feature is important to you, it may be worth shopping around to find a lender who waives this constraint.

5. Fees

Be sure to read the fine print on fees when choosing a small business line of credit. Lenders may charge an annual fee to keep the bank account open even if the line isn’t being used. You may also be subject to a transaction fee for using the line, which can include borrowing from or repayment. Owners should also be aware of any opening fees to set up your business checking account or closing fees if you ever decide to forfeit the line.

Conclusion: Choose the Right Business Line of Credit for Your Company

There are many benefits to business lines of credit including flexible repayment terms and immediate access to cash. It is also far less expensive than business credit cards, which operate like revolving credit but typically have higher APRs. However, choosing the right offer could mean material savings to your business down the line. Besides weighing the attractiveness of the terms, it’s also important to consider what you need the line of credit for and how you plan to use it. Carefully consider your business’s financial needs and choose the offer that will cost your business as little as possible in the long run.

Do you have a business line of credit? How has it affected your products and services? Tell us about your experience in the comment section below!

Editor’s Note: This post was updated for accuracy and comprehensiveness in February 2019.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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