When you need funding to grow your business, you have several possible avenues available depending on the company’s credit profile, revenue, and needs. A business line of credit, such as the option offered by American Federal Credit Union, is a flexible option that can provide a significant funding stream to cover equipment, supplies, inventory, marketing, and countless other operational costs. Learn how this type of financing works and what to look for when shopping for business credit.
How Does a Business Line of Credit Work?
Business credit lines are a popular financing option for small and medium-sized businesses because of their flexibility. As with a traditional consumer line of credit, you will receive a credit limit and can borrow as much money as you need up to that limit. As you repay the balance, you can borrow the money again, as long as you do not exceed your allowable funds.
This arrangement, known as a revolving line of credit, allows business owners to smooth out variable cash flow, grab short-term opportunities that require immediate funding, and purchase inventory and supplies to expand the business. When you need working capital, a business line of credit provides the affordable liquidity your enterprise needs to flourish.
Businesses with strong revenue and good credit can typically qualify for an unsecured business line of credit. For newer firms with limited credit or revenue, secured credit lines are available. This type of financing requires collateral, such as a vehicle, real estate, equipment, inventory, or accounts payable. The lender can place a lien on the collateral, which can be collected in the case of default.
How Can I Choose the Best Line of Credit for My Business?
These are some questions to ask when evaluating a commercial line of credit to see whether it fits your company’s needs:
- Does the bank or credit union offer a convenient online application process? What types of information security measures are in place?
- Can I get preapproved without a hard credit check? Too many hard inquiries can damage the company’s credit score.
- What are the qualifications for credit approval? Can my company meet those requirements? For example, many business credit lines have a minimum revenue requirement between $25,000 and $100,000 a year. You will also have to demonstrate that your company has been in existence for at least three months. For the most competitive interest rates, your company should have a credit score of at least 600 and at least two years of history.
- How long will it take for approval after submitting a credit application? Many banks and credit unions offer financing within just a day or two of approval.
- What interest rate can I expect to pay on my credit line? Is the rate fixed or variable? Depending on the credit profile of your company, you can expect to pay between 4% and 14% on this type of credit line. The better your business credit, the better your interest rate. You should also check whether the interest rate increases for late payments. Some rates can exceed 30%.
- How much credit can I access? In general, business credit lines range from $100,000 to $500,000. Companies that can demonstrate higher revenue can qualify for higher credit limits.
- What type of fees are associated with the business credit line? Examples include origination fees, late payment fees, annual fees, maintenance fees, and finance charges.
- How will the lender deliver the funds? For example, you may have the option of direct deposit, electronic transfer, or paper check.
American United Federal Credit Union has been committed to our clients in Salt Lake and Tooele counties for nearly 70 years. Business clients have access to diverse funding options, including both secured and unsecured lines of credit. Explore the possibilities, then contact us online today to start your application.
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