Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

Small businesses often work with slim profit margins. As such, it can make it more difficult for small business owners to pay themselves a living wage. One way to raise your business’s profit potential is through small business financing. However, your current business revenue plays an important role in the types of financing and how much funding you can get.

For many, a small business line of credit is a more accessible, flexible funding alternative to a traditional bank loan. However, your business’s income is an important factor in determining your line of credit terms.

In this article:

• Learn what a small business line of credit is and how it may be more useful for your business than a business loan.
• Understand the eligibility requirements for a business line of credit, including income qualifications.
• Discover how a stronger business financial profile can help secure a better line of credit.

What is a Business Line of Credit?

First off, what exactly is a business line of credit? This flexible funding solution is a cross between a small business loan and a business credit card. Once approved, a small business owner will have access to a maximum credit line upon which you may draw cash to make business purchases or fund operating expenses like payroll or rent.

Rather than paying interest on the entire loan amount, you only pay interest on what you use. Once you’ve paid the balance back, like a credit card, you’ll have access to the full amount again.

Business lines of credit are easier to qualify for than term loans and offer more flexibility for business owners. You can often get an unsecured business line of credit which requires no collateral or personal guarantee that you’ll pay the money back. (Although both your personal credit score and business credit score will fall if you’re late on payments or default entirely. That can limit your small business credit potential going forward.)

What Are the Business Line of Credit Qualification Requirements?

Business lines of credit are offered by many traditional and online lenders. They tend to be much easier to qualify for than term loans, making them a suitable source of financing for small business owners who cannot otherwise qualify for funding. That includes business owners with bad credit, startups, and established businesses that earn only small profits.

Typically, the minimum FICO score you need to qualify for a business line of credit is 600, and your business will need to earn $120,000 in annual revenue.

Factors Impacting Business Line of Credit Terms

Credit card companies, banks, credit unions, and alternative lenders all have different qualification requirements, but all generally operate under the same guiding principles.

Basically, if you have a higher credit score, you’ll be eligible for lower interest rates. If you have high annual revenues, you’ll be eligible for higher credit limits. The greater debts your business has, or the worse its credit history is, the more difficult it will be to qualify for any kind of financing. Like any financing option, your creditworthiness has a significant impact on loan terms.

Depending on the lender and borrower’s profile, business line of credit interest rates may range from 8% to over 60%. Usually, credit limits range from $5,000 to $500,000.

Unsecured business lines of credit are common, so collateral usually isn’t needed to qualify. However, if you need a higher limit to fund specific growth initiatives or it’s important that you have a lower interest rate, you may offer collateral if you have it. Some forms of collateral include equipment, real estate, or personal finances like stock holdings or cash.

How Much Do Small Business Owners Make?

One of the primary reasons a small business line of credit is such an asset is because it allows small business owners to avoid dipping into their personal assets to pay employees, acquire inventory, pay rent, or any number of other business needs.

That’s important, because the average salary of a small business owner is only about $70,000. Lenders only consider top-line gross revenue rather than net profit, so the salary you pay yourself won’t impact the terms you may qualify for. However, it will cut into your business’s liquidity, making investing in expansion or navigating financial emergencies difficult. This is one reason why a business line of credit is so valuable to business owners.

How a Business Line of Credit Can Benefit a Small Business

Debt financing is extremely common in American business. However, you don’t need to take on long repayment terms that requires hefty monthly payments. With a business line of credit, you’ll have the flexibility to access cash when you need it and repay it as your business performs well.

Some of the key benefits of a business line of credit include:

• Financial flexibility to pay unforeseen or emergency expenses.
• Funding new businesses with access to a revolving lump sum of financing.
• Access to cash for growth initiatives like marketing campaigns or inventory acquisition.
• Consolidating other business debts.
• Paying overhead and business expenses when business is slow.
• Financial flexibility to pay yourself a higher salary and avoid funding the business out of your personal assets.

Used properly and responsibly, debt can transform your business and push it into the black. One of the chief ways to increase your business’s earning capacity is to expand its operations. Whether that means opening a second location, investing in more efficient equipment, or hiring more staff, debt like a business line of credit allows you to do that without overstretching your budget.

Moreover, the goal of any small business is to make money. Not just the business, but you as an entrepreneur, too. With a business line of credit, you’ll have additional flexibility to pay yourself a wage that supports your lifestyle.

How to Get a Business Line of Credit

The loan application process for a business line of credit is usually quite simple. The step-by-step process looks like this:

1. Determine your needs: How much money do you really need access to? What’s the highest interest rate you can accept? Understanding the answers to these questions will inform which financial institutions you apply with.
2. Research lender: There are many line of credit options out there and most lenders are transparent about introductory offers, credit limits, and other terms that you may be eligible for. The best business line of credit for you may offer initial periods with 0% annual percentage rates (APR).
3. Apply: Once you find a lender you like, you can typically apply online. The approval process may take less than 24 hours of just one business day.
4. Access your credit: Once approved, you may have funding within a few business days, and possibly same-day from some lenders.

Strategies to Repay a Business Line of Credit

Getting approved is often the easiest part. To ensure you’re building your credit score rather than harming it, you’ll have to use the line of credit responsibly. Here are some good strategies to help you stay in good standing.

• Only draw money when you need to: If you can pay certain expenses with your existing budget, do so. Every time you draw on your line of credit, you’ll have to pay back more due to the interest charges.
• Never draw more than you need: Make purchases or payments that are absolutely necessary, and leave it at that.
• Budget proactively: Effective planning will help you keep your small business line of credit under control. Earmark a little money every month to serve as interest payments for the event that you do draw on your credit.

Conclusion

The more your business makes, the better terms you can get on a small business line of credit. However, the best business lines of credit are still available to businesses making only a small profit. In fact, they can be great assets to help you expand your business and increase your profits. Applying online for a business line of credit is easy, and can give your business access to quick cash flow and working capital.

FAQs

What is a business line of credit?

A business line of credit is part loan, part business credit card. A lender approves you for a maximum credit amount which you can draw upon to make purchases. You only pay interest on the amount you use, rather than the full approved amount. Since it’s a revolving line of credit, once you pay back the amount you drew, plus interest, you’ll have access to the full amount again.

What can you use a business line of credit for?

A business line of credit offers fast access to cash to pay overhead, make business purchases, settle operating expenses, consolidate debt, and much more. It’s a cash equivalent, so if you can buy something with cash, you can probably do it with your line of credit.

How much do small business owners make?

According to PayScale, the average small business owner makes about $70,000 per year.

How does small business income affect business lines of credit?

Business lines of credit have relatively low eligibility requirements. However, businesses with higher annual revenues and business owners with better personal credit scores are more likely to qualify for unsecured business lines of credit with low interest rates and high limits.

Is a line of credit considered income for a business?

No, a business line of credit is not considered business income. On the contrary, it’s considered a liability as it is a form of debt.

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