Lines of credit are one of the most popular financial products for small businesses. They operate very similarly to credit cards, making them easy to manage while providing businesses with the flexibility needed to run a business.
What are Lines of Credit?
Like a credit card, lines of credit provide access to a sum of money that becomes available again after repayment. However, unlike credit cards, they often come with many more restrictions and terms making them incredibly difficult to qualify for. A commercial line of credit must be used for qualified business expenses (e.g., equipment, supplies, payroll, etc. They come with financial fees that are paid on the outstanding balance and often involve maintenance/availability fees.
Lines of credit are often sought after for their flexibility and low-interest rates. They are typically cheaper than any other alternative financing solutions and are able to provide cash for your business a lot quicker than loans can.
How to Apply
One of the major drawbacks of lines of credit is that they are incredibly difficult to get. Lenders require applicants to have at least two years of operating profits in addition to assets and proof of income. They often check the background and credit history of both the business and business owner and examine the financial ratios for both. Applying for a line of credit will involve submitting detailed copies of your financial records including business expenses, accounts receivable, assets, liens, and profit and loss statements.
The Fine Print
Lines of credit fall into two categories: secured and unsecured. Secured lines of credit are guaranteed by personal and corporate assets. This security allows lenders to foreclose on any listed assets in the event that the borrower is not able to meet their financial obligations. While no specific item of collateral is listed and personal and business assets are protected, the line of credit is guaranteed by the business and business owner. This means that the lender can and will sue in order to recoup the money owed.
It’s also important to know that many financial institutions also require borrowers to repay the full balance yearly in an attempt to “rest the line”. Knowing this beforehand can help you plan and schedule payments in a way that is most beneficial for your business.
If you are unable to qualify for a commercial line of credit other lending options (e.g., invoice factoring, purchase order financing, asset-based lending, etc) are available at reasonable rates. Contact Hornet Capital Solutions to speak to a professional about your financing options today.