If you are a small or medium business owner, the highs and lows of doing business are not strange. A lot of these swings have got to do with the companyâ€™s financials or operations.
Seasonal demands for credit caused by time gaps between revenue realization and working capital needs can cause immense challenges in managing cash flow.
Cash fluctuations are more common in start-ups than established businesses. This is because start-ups are often less experienced about the markets or are yet to diversify product lines sufficiently in order to maintain constant positive cash flow.
In some cases, when a young business is unable to meet the cash needs consistently, cash flow problems can force entrepreneurs to close down. This may happen even though the business may be profitable on paper.
If you are a start-up business owner, you should always have sufficient cash on hand to meet the cash flow needs. Savings are an excellent way to bridge this gap. However, savings may not be enough to meet business needs. In such a case, a business line of credit is an excellent solution to meet and manage cash flow needs sustainably.
Also known as a revolver, a business line of credit is basically a kind of loan that financiers extend to businesses to enable entrepreneurs to meet short term working capital needs. Business owners are able to draw cash for their business needs against a large pool of cash.
Hereâ€™s a quick view of the top five business line of credit lenders:
Kabbage is an ideal lender for start-ups and less established businesses. You donâ€™t have to meet conventional credit scores. Instead, they rely on other business data to derive your ability to repay.
It offers a line of credit ranging from $ 2,000 to $ 150,000. Given the risk exposure, it is not a surprise that they require repayments to be done within six to 12 months and the APRs range from 32% to 108 %.
Credibly is yet another platform suitable for less mature businesses. You can access lines of credit of up to $ 250,000 at APRs ranging from 9.99% to 36%.
Also, be ready to part with a 2.5% set up fee and once approved and funded, you are expected to repay borrowed money within 6 to 15 months (depending on loan term).
To qualify for the facility, youâ€™ll need to have been in business for a minimum of six months, or have a credit score of at least 500 and have an average of $ 10,000 per month in business deposits. In addition, youâ€™ll need to provide collateral and the businessâ€™ tax returns for facilities exceeding $ 100,000.
Ondeck is an excellent platform for upcoming businesses. They offer lines of credit of up to $ 100,000 and APRs range from 13.99% to 63%. This platform is better for businesses that have outgrown the initial stages.
You need to have a good credit score (at least 600) and the business needs to have been in operation for at least one year. Repayments are usually done weekly and borrowed money should be paid back within six months.
Lending Club is a peer to peer lending platform that offers business lines of credit ranging from $5,000 to $300,000 for up to 25 months.
You need to have been in business for at least 24 months, make $75,000 or more in annual revenue. Also, your personal credit score should be at least 620 with no recent black spots such as bankruptcies or tax liens. You need to offer collateral for lines of credit over $100,000.
The APR ranges from 7.77% to 35.11% and they have several applicable fees for the facility such as origination fees, payment by check fee, and late payment fees.
Credibility Capital is a platform suitable for mature businesses with strong credit. They offer a line of credit facilities of up to $350,000 for up to 36 months, the APRs range from 8% to 25% and expect to pay an origination fee of 3-5%.
In order to qualify, the business needs to have been in operation for at least 18 months, have a personal credit score of 680 with no bankruptcies or liens within the last 5 years. It must also generate an average of $250,000 in annual revenue.
Moreover, the lender requires that you should secure the facility with personal guarantees and a general lien on business assets (UCC-1 filing).
It is also known as revolver since it is revolving credit and you pay interest only for the portion of the money that is borrowed. For instance, if your company has a line of credit of up to $ 50,000 and you draw only $ 5,000, youâ€™ll pay interest on the $ 5,000 only.
Therefore, a line of credit works pretty much like your ordinary credit card. However, it is exclusively on cash terms. Therefore, the APR charges are lower than credit cards and there are no cash advance fees.
The repayment terms vary from one lender to the other but generally range between 6 months and 5 years. Interest rates are affected by a variety of factors. Key among these is your (and your businessâ€™) creditworthiness.
Although there are many brand names and variations, there are two basic types of line of credit products: secured and unsecured facilities. Each comes with itsâ€™ set of pros and cons.
In this type, borrowers must provide the lender with collateral for the facility. It may be a short-term asset such as inventory or your accounts receivable.
The collateral secures the facility and if the borrower fails to pay the loan, the lender can seize the assets, liquidize them and use the proceeds to settle the balance.
A secured business line of credit is typically applied and approved for medium to large sums of cash. It attracts lower interest rates due to the existence of collateral.
In this kind of loan, borrowers can access the facility without having to put up collateral. These are relationship and character-based facilities, therefore, a strong credit rating and a proven business track record are essential for approval.
Since lenders are exposing themselves to more risk in case of default, by not seeking collateral, they charge higher interest rates and the facilities are normally smaller.
Many entrepreneurs, established and developing, agree that a business line of credit is an excellent way to fund short term working capital and operational expenditures needs such as inventory replenishment or payroll payments. This is because this kind of facility has the following benefits:
However, business line of credit has also some drawbacks which include the following:
The best lenders will not just have the most competitive rates but are transparent on the terms of payment. Also, the product structure will have a good fit with your business needs.
Before you settle for a lender, you should assess the following:
As you can see from our listing, some of the best financiers are the non-traditional lenders, such as online lenders. Although banks are a significant source of line of credit facilities, and you can land an excellent deal with your bank, traditional banks often have complex qualification criteria.
Most banks require entrepreneurs to provide:
These requirements are essential for prudent management and lending. However, they are out of reach for many start-ups and SMEs.
In addition, bank approvals for a line of credit facility often take long -Time which many start-ups and SMEs donâ€™t have on their side. Therefore, traditional lenders have steadily lost ground to modern lenders, who have become the preferred source of line of credit facilities.
Nonetheless, before you settle for a lender, you should assess:
The best lenders will not just have the most competitive rates but are also transparent on the terms of payment and their product structures will have a good fit with your business.
As you can see from the review above, most lenders have unique qualification criteria. However, features such as your personal credit score, business history with positive cash flow and revenue are vital and common.
Regarding the credit score, you can register your companyâ€™s Federal Employment Identification Number (FEIN) with Dunn and Bradstreet, Experian, Equifax and FICO and start building the companyâ€™s credit report separately from your personal report.
In terms of documentation, your business financials, bank statements and personal and business tax returns are vital. This article will help you make amends in case you missed to file your tax returns.
If your company needs a flexible source of financing to manage cash flow pressures, meet unexpected operational expenses or boost working capital, then you should consider a business line of credit.
In addition, your business should be able to meet the lenderâ€™s eligibility requirements and be able to repay the advances within a short time. This way, you will save money on the line of credit as compared to a typical term loan.
If your business is new and you are yet to establish a formidable credit history, a short term secured line of credit may be more suitable to meet your cash flow needs.
On the other hand, an established business with a solid financial history can benefit from any type of facility. But you have to spot the right kind of lender, whose terms and interest rates will not in-turn work against the business.
Scouting for lenders, applying for a business line of credit, qualifying, getting approved and receiving the facility is quite a journey for any upcoming business and a significant milestone.
However, the funding will mean nothing if it doesnâ€™t work for the business. The flexibility of the facility makes it so handy that you can access the funds whenever you need and use them for almost anything you may want.
Although, there is the danger of overindulging, and the facility may turn into a stumbling block rather than a stepping stone.
You need to know how to apply a business line of credit effectively and make it work for you.
First, shop for a lender, apply and get approval before you need the facility. Usually, the approval process may take longer than what most platforms advertise. So, you need to get time on your side by shopping and applying way before you are hard pressed for funds.
Also, if you apply when you donâ€™t need the facility, chances are high that your cash flow will be healthy and you have good financials to back up your request. Moreover, your chances of getting approval are high.
Second, limit its use. Limit its use to funding the right kind of business needs. That is short-term operational expenses and business needs such as purchasing short term inventory or financing a marketing campaign.
Avoid utilizing the funds to purchase long-term investments since the interest rates are high. If you are in need of big-ticket purchase, look for an alternative, cost-effective facility.
Third, make payments promptly. Just as you would on your personal credit card, make prompt payments in order to avoid excessive accumulation of interest charges and to leave the facility open in case of an emergency.
You should also adjust payments to reflect the businessâ€™ cash flow movements. During peak seasons, adjust to allow larger payments, and during off-peak seasons, reduce payments accordingly.
Fourth, avoid using the facility to meet regular operational expenses. A business line of credit is best used for occasional, often unforeseen expenses. For instance, you can use it to pay the payroll if thereâ€™s a delay in accounts receivables.
Once you have received the payments, you should immediately refund the facility and account for the interest. It should not be used to meet expenses regularly. If you do that, chances are high that youâ€™ll complicate the accounting process and you are likely to max-out the facility for a longer period, thereby attracting higher interests.
In conclusion, managing cash flow in a business can be tricky. This is particularly true for young enterprises. Use this information to learn more about the business line of credit as a viable alternative for your company. Youâ€™ll also learn about the best lenders, how to spot them and finally how you can make it work for you.