Since the funds available with a small business line of credit are typically less than those of a term loan, a line of credit is usually used for more immediate expenses and not for making long-term investments.
Important note: The best business line of credit terms and conditions are made available to those businesses that have higher credit scores, higher monthly revenues, and have been in operation for more time.
Business lines of credit come in two general categories:
1. Revolving business lines of credit - means that the line replenishes after withdrawals are repaid; for larger businesses that have strong credit scores; credit limits are generally higher
2. Non-revolving business lines of credit - means that the line doesn't replenish; for smaller businesses that have weaker credit scores; credit limits are generally lower
3. Secured business lines of credit - a line of credit which is backed by a valuable asset (collateral) such as real estate, a vehicle, accounts receivable, equipment, or inventory
4. Unsecured business lines of credit - a line of credit that doesn't require the borrower to provide collateral, but usually has higher interest rates and stricter qualifications
An unsecured business line of credit works very similarly to a credit card. The lender takes on more of a risk than you do since there’s no collateral for them to seize if you default. That heightened risk on the lender’s part results in a few key differences from secured business lines of credit, including:
It’s important to note that with a business line of credit, you’ll only pay interest on the amount that you borrow. If you’re approved for a credit line of $15,000 and you withdraw $2,000, you only have to pay interest on $2,000. That’s a great advantage compared to lump-sum loans which require you to pay interest on the total loan amount regardless of whether or not you put the funds to use.
Let’s continue with that example and calculate how much you’d really pay on that $2,000 withdrawal. To keep this example simple, we’ll assume that you use your line of credit for regularly scheduled payments that give you an average daily balance of $2,000.
We’ll also assume that the interest rate on that line of credit is 11%, and the payments are made weekly. We first take 11% APR and divide it by 365 days in the year, which gives us roughly 0.0301% interest daily. To calculate the weekly interest you’d pay on a $2,000 withdrawal we’d multiply the amount by the daily interest rate, and then multiply that amount by 7.
Although lines of credit come in a variety of forms, the common trait between them all is the ability for borrowers to use the available funds on an as-needed basis. Flexibility is the main advantage of a small business line of credit which in turn allows for even very young businesses as well as those with poor credit scores to obtain this form of funding. Business line of credit for new business? No problem!
Every business has different needs and a different LendingScore which means the available types of small business lines of credit will be different from one business to the next.
Line of credit terms can vary from around 3 months to up to 5 years. The payback schedule will vary also - some lenders will ask for monthly payments, others weekly, bi-weekly or even daily. Businesses can also choose between an unsecured business line of credit and a secured line of credit, the difference being whether or not the business owner has to provide collateral. An unsecured line of credit is one of the best financing solutions for young businesses, but you'll have to demonstrate your reliability as a borrower in order to qualify.
The credit limit and the business line of credit rates will also depend on your LendingScore™, as score ranging between 0 and 100 which is calculated based on several ‘funding factors’ such as your monthly revenue, business financials, credit score, business age and more. A better LendingScore™ means you'll have a higher likelihood of getting approved for business financing.
Bottom line: The terms and conditions of a line of credit depend on a variety of different factors. To find out if you can qualify for a business line of credit and to check your LendingScore™ for free.
Who can benefit from a small business line of credit?
While businesses of all types will find a line of credit as a useful financing option, some businesses stand to gain more, for example:
✔ Businesses that don’t have assets to use as collateral (unsecured business line of credit)
✔ Businesses that need fast funding
✔ Businesses with low credit scores (300+ FICO score minimum)
✔ Businesses that want a flexible funding solution
✔ Businesses that have operated for as little as 3 months
In plain language, the credit score requirement for a business line of credit will vary greatly between different loan providers. At Become we are able to help business owners with credit scores as low as 300 (FICO) to qualify for a business line of credit.
Onyx goes above-and-beyond to provide business owners with the best possible chance of getting funded. By using advanced algorithms, Become is able to quickly and accurately assess a business’s financial profile. And by partnering up with dozens of the top loan providers in the USA and Australia, Onyx is able to connect businesses with the lenders that are the optimal match for their profile and needs.
Since dozens of loan providers translates to a wide range of different products and services, Onyx is able to tailor-fit businesses to the loans that are right for them. This also means that the terms and conditions (as well as business line of credit rates) will differ from lender to lender. Business lines of credit offered by the lenders in the Become network have FICO credit score requirements that can dip as low as 300!
This means that businesses with less-than-impressive credit histories are still capable of obtaining the financing they need (or want!). But don’t forget that businesses with a better credit history will receive the best business line of credit terms since they’re seen as less risky. The bottom line is, the credit limit and term length will come down to the level of risk the lender is willing to take.