Lines of Credit (LOCs):
What are they?
A Line of Credit (LOC) is a flexible financing option that allows businesses to borrow money up to a predetermined limit whenever they need it. Unlike a traditional loan, where you receive a lump sum upfront, a line of credit gives you access to funds that you can draw from as needed, making it ideal for managing cash flow, covering unexpected expenses, or financing short-term needs.
Here’s how it works: When a business is approved for a line of credit, the lender sets a maximum amount that can be borrowed. The business can then draw on these funds as necessary, only paying interest on the amount borrowed, not on the entire credit limit. Once the borrowed amount is repaid, the business can borrow again up to the original limit, making a line of credit a revolving source of funds.
Lines of credit offer significant flexibility, allowing businesses to respond quickly to opportunities or challenges without the need for multiple loan applications. They can be unsecured or secured, with the latter often offering higher credit limits and lower interest rates.
How do I get one?
To qualify for a Line of Credit, businesses need to meet several requirements. Here are the key ones:
Creditworthiness: Lenders will closely examine the credit history of the business and its owners. A strong credit score and a history of responsible credit use are crucial for qualifying and securing favorable terms.
Business Revenue: The business must demonstrate consistent revenue that shows its ability to repay any borrowed funds. Lenders often require financial statements, including profit and loss statements, to assess this.
Time in Business: Lenders usually require that the business has been operating for at least one to two years, though this can vary depending on the lender.
Collateral (if required): For secured lines of credit, the business may need to provide collateral, such as property, inventory, or accounts receivable. This reduces the lender’s risk and may allow for a higher credit limit or lower interest rate.
Purpose of Funds: While lines of credit are flexible, some lenders may require an explanation of how the funds will be used, especially if the credit line is large. Common uses include managing cash flow, purchasing inventory, or covering unexpected expenses.
Debt-to-Income Ratio: Lenders will evaluate the business’s current debt relative to its income to ensure it can handle additional borrowing. A lower debt-to-income ratio is generally more favorable.
Interest Rates and Fees:
Interest rates on lines of credit can vary widely based on the business’s creditworthiness, the type of credit line, and the lender. Rates are often variable, meaning they can change over time. Some lines of credit may also come with maintenance fees, draw fees, or other costs, so it’s essential to review the terms carefully.
Questions? You’re Covered
Typically, a minimum credit score of 650 is preferred, but higher scores may qualify for better terms.
The process can take anywhere from a few days to a couple of weeks, depending on the complexity of the application and the amount requested.