Every single business should have a line of credit. Having a line of credit is important to be able to take advantage of opportunities, to use for short term needs and for any unforeseen challenges or cash flow issues an entrepreneur may face. I’ll go into how lines of credit work, what the qualifications are, how to use them and the process for applying for a line of credit.
Business lines of credit allow a business owner to draw up to the maximum amount of the line they are approved for at any time and for any reason. Let’s say a business has a $200,000 line of credit with a 0 balance. That business can draw on it whenever they need it. The business only pays on the amount they draw. If the line of credit is a 24 month line of credit with 9% simple interest and they choose to draw $100,000 they will only pay interest on that $100,000. That draw would be scheduled to pay over 24 months if it’s not paid back early. The most the business would pay back if they go full term( don’t pay early) would be $118,000 in monthly installments of around $4,916.67. If this line is paid early the business would save on any remaining interest owed. Most business lines of credit have a draw fee of 2.5-4%.
The qualifications for a line of credit vary depending on the bank/underwriter. Here are the bare minimums for a line of credit. A business needs to be open at least 1 year(preferably 2+), the owner has to have at least 650 credit( the higher the credit the better the terms of the LOC will be), have at least $30,000/month in revenue going into a business bank account with great cash flow (no negative days, strong average daily balances, 8+ deposits each month, etc). These are the absolute basics. Stronger credit, strong business credit, more revenue and a longer time in business will help to get better terms. Typically an entrepreneur can expect to get approved for 25-125% of their average monthly revenue. To get an accurate average add up the revenue of the last 6 months of business bank statements and divide by 6.
Lines of credit work best when they are used for short term uses. Short term uses are any (daily, weekly, or monthly) repeated business expense. For example, marketing, supplies, inventory, adding to staff. Having an open line of credit allows a business to take advantage of opportunities such as vendor sales or if a competitor goes out of business and you can purchase assets at liquidation prices. A business line of credit also helps in case of emergencies. This is why every business should have a line of credit open at all times.
The process for applying for a business line of credit is simple and straightforward. From application to an established line of credit can take 24-72 hours. Typically you need a 1 page application, the last 6 months of business bank statements, driver’s license, voided check and the most recent business tax return. Once the line of credit is approved you login in to accept terms then you can place a small draw. It’s like logging in to online banking to make a transfer, it’s that simple. If you would like to see what’s available or if you have questions please reach out.