Lines of Credit for Small Businesses: Things You Need to Know


Minyang Jiang

If you’re in business for yourself, you’ve probably already experienced times where additional funds could have come in handy.

No matter what niche you’re in, access to extra cash here and there can help you stay in business, and remain profitable.

This is where lines of credit for small businesses can prove to be extremely helpful.

What is a Business Line of Credit?

A business line of credit is a funding solution that is intended to help small businesses meet short-term cash needs. Buying equipment, beefing up inventory, and covering operating expenses are all examples of such short-term expenses. Basically, a business line of credit is a funding option designed to help small businesses grow and flourish.

All businesses big and small will experience some level of cash flow issues at some point in time. Plenty of unexpected scenarios can occur at any time that can put a dent in the financials of the strongest of businesses.

A sudden drop in sales, unexpected bills, theft of equipment and inventory, and even over-hiring staff can put you in a position to have to tap into your cash reserves, leaving you a little low in funds. The need for additional money is to be expected, regardless of the reason.

A business line of credit is quite similar to how a credit card works. You’re given access to a certain amount of money to use as needed. Regular payments are made (unless the lender specifies a different payment schedule), and you’re free to continually withdraw money as your principal is paid down.

Interest is only charged on the portion of the funds withdrawn. The interest rate on a business line of credit is usually lower than credit card rates, and only slightly higher than the prime lending rate.

Why Would Lines of Credit For Small Businesses Be Needed?

This type of financing program is a great option for those times when business is slow, which is typical for seasonal type businesses like a surf shop or ice cream parlor that are typically busy during the summer but slower during the colder months of the year. In order to offset the valleys in profits, a business line of credit can help manage working capital needs.

The line of credit can provide businesses with access to cash that will allow them to pay their bills on time, despite slower sales. It can give businesses credit to buy additional inventory if needed just before the busy season starts to ramp up. When sales are strong again, there will be enough money coming in to comfortably pay back the business line of credit and interest.

There are plenty of reasons why your business could benefit from a business line of credit. You can use the funds to pay for unexpected expenses, repair equipment, start a new marketing campaign, remodel your current business storefront, purchase additional inventory, and take advantage of an opportunity to purchase inventory at a discount before the price goes up.

What to Consider Before Applying For a Business Line of Credit

There are a few things to consider first before you apply for a business line of credit:

Demonstrate a positive cash flow

An unsecured line of credit will most likely require a positive cash flow, so you’d be well-advised to get all your ducks in a row and demonstrate this as much as possible. Your entire company performance will be reviewed when you apply for a business line of credit.

The past, present, and projected earnings of your business will be considered by lenders to see if you qualify for a line of credit. And if you do, the amount you are given will also depend on these factors.

Don’t max out your credit cards

You might be given a certain credit limit on your credit cards, but you’d be better off never getting close to it. Maxed out credit cards aren’t looked upon favorably by lenders.

Not only that, but you’ll be dishing out a lot of cash on super high-interest rates on outstanding balances. A business line of credit will most certainly offer a more reasonable interest rate in comparison.

Consider a line of credit on the smaller side

If your credit score isn’t the greatest, start small and take whatever amount the lender is willing to offer you, even if it’s less than what you actually require.

Make sure you pay in full and on time, every time. This will help you build your credit back up, at which point you can then request a bigger line of credit amount.

Consider applying before you need the money

The best time to apply for a business line of credit is before you actually need the money. That way you’ll have access to cash quickly when the need arises. For instance, if you need a little extra cash to pay off a supplier, you’ll have the money available without having to spend time waiting for the application and approval process to get a loan.

Not only that, but if you apply for a line of credit when your cash flow is healthy and your sales are strong, you’ll be more likely to get approved for a heftier line of credit.

Credibly Business Lines of Credit

A business line of credit could be the perfect financing solution for your small business, but you won’t know for sure until you’ve closely examined your business needs and the options available from various lenders.

At Credibly, we can help you navigate the waters of financing programs, including lines of credit for small businesses.

For more information about what your alternative funding solutions are, contact Credibly. Or to get started, fill out our pre-qualification form – it’s free and easy and won’t hurt your credit.