As a small to medium sized business owner, you frequently learn from your successes and personally develop from your mistakes; a fact of any business-you need money to sustain your business and allow further growth. While many small to medium sized businesses still find themselves repairing the damages left by mandatory shutdowns last year, a sinking bank account elicits additional pressure to secure additional funds.
Habitually, many of these owners head straight to a bank in hopes of getting help.
However, more than 80% of these business owners are denied a bank loan-leading them to evaluate secondary lines of credit.
What Is a Line of Credit?
A line of credit acts as an unsecured business loan, where business owners can maintain continuous access to funds to streamline inevitable changes in expenses and revenue.
Even businesses that are currently profitable-yet not entirely secure- can benefit from a line of credit. Keeping a readily available line of credit can assure confidence in the case of unexpected growth or advancement opportunities. A flexible and often low cost option, a line of credit obtains short-term financing to cover working capital needs.
How Does It Work?
A flexible loan option for smaller to medium sized businesses, a line of credit may also be referred to as a revolving line of credit. If you have or currently use a credit card, you are already familiar with the process: you access funds from the specified credit line, pay back the minimum or full balance, and access it again. A line of credit provides the business owner with the control of the borrowed capital-deciding where, if, and how they will spend the money.
Interest typically only charges for the amount of accessed credit line, and interest rates may be variable or fixed. As with other forms of credit, variable interest rates generally change with interest rates in the economy. A few lenders charge a draw fee each time you access the credit. Furthermore, if you don’t use your line of credit, there may be an origination fee, annual fee, and/or monthly service fee.
For any line of credit that you consider, you must carefully read the terms and conditions to ensure that you understand any additional fees that may apply.
Expect a specified repayment period, where your payments will vary depending on the amount that you borrow. With many traditional bank lines of credit, there may be a draw period where you can access funds and make interest payments. After this, the business owner may enter a repayment period where the outstanding balance must be repaid over a designated time.
On the other hand, online business lenders typically offer short term lines of credit that must be paid back over a shorter period of time.
Advantages to a business line of credit
Seasonal fluctuations: If your business sales annually drop in the winter and pick up in the summer, a line of credit may help you in a season of low sales.
Extra capital: Let’s say that you land a new client, a line of credit can cover costs of labor and/or supplies and production expenses.
Help until you get paid: Whether your clients typically wait weeks or longer to pay you for your products or service, a line of credit can help cover expenses until then.
Best Business Lines of Credit (that aren’t a traditional bank)
- Fundbox: A popular online, financial service which has helped over 50,000 businesses acquire funding.
Eligibility Requirements: Your business must be based in the US and should have been in business for at least 6 months with annual revenues of at least $100,000, a personal FICO score of 600+ and a business checking account. If you qualify, you’ll make weekly payments for 12 or 24 weeks. Interest rates vary.
Pros:
- Low eligibility requirements
- Convenience
- Straightforward rates and services
- Quick application process
- Applying for Fundbox credit does not affect your credit score
Cons:
- High interest rates
- Requires weekly repayments for some products
2. Ondeck: One of the oldest online lenders in the market, Ondeck offers fast approval for lines of credit between $6,000 and $100,000.
Eligibility Requirements: Your business must have been in business for at least 12 months with annual revenues of 100,000, a personal credit score of 600+, and make at least 5 bank transactions per month.
Pros
- Low eligibility requirement
- Fast and convenient
- Available to US, Australian, and Canadian small businesses
Cons
- The high cost of capital
3. Bluevine: Launched back in 2013, Bluevine has lent out $3 billion in funds to over 250,000 borrowers while creating a reputation for transparency and convenience.
Eligibility: Bluevine offers 2 lines of credit packages-6 months and 12 months-with each having different requirements.
- 6 month: Referred to as Flex 6, this six month line of credit required weekly payments.
Your business must be located in the US(excluding North & South Dakota),have been in business for at least 6 months with an annual revenues of at least 120,000, a personal credit score of 600+, and no record of bankruptcies within the past year.
Industry. Most except prohibited industries like pornography, auto sales, gambling, legal and illegal substance, firearms, political campaigns, financial services, and nonprofit organizations
- 12 month: Alongside the 6 month line of credit, Bluevine also offers a 12 month option, with the ability to switch from a 6 to 12 month. Customers wanting to switch from a 6 to 12 month must make at least ten weeks of repayments to qualify, in addition to meeting revenue and credit score requirements.
Pros
- Low eligibility requirement
- Low cost
- Top-notch customer service
- No hidden costs
Cons
- The cost can be high for businesses with low fundamentals
- Quick repayment structure
- Only available to B2B companies
- Available to US residents only
4. Streetshares: Originally an online lender aimed at veterans, their services are now available to anyone-positioned as a more affordable option.
Eligibility Requirements: To secure a line of credit, Streetshares requires that your business has been in business for at least 1 year(or if it has earned over 100,000 in less than a year it drops to 6 months) with annual revenue of 100,000, a personal credit score of 600+ (620+ for veterans), and not based in North Dakota, South Dakota, Nevada, or Montana.
Additionally, Streetshares does not offer services to startups, house flippers, law firms, transportation, gambling and casinos, and recreational drugs.
Pros
- Fast application process
- Low rates
- Low eligibility criteria
- Diverse options
Cons
- Weekly repayments
- Short term limits
- Borrowing limit up to 20% of revenue
5. Kabbage: Launched in 2009, Kabbage is very fast and convenient, however, this convenience comes at a price with it positioned at the more expensive side of the spectrum.
Eligibility Requirements: To secure a Kabbage line of credit, businesses must have been in business for at least 1 year with annual revenues of at least 50,000. This online provider does not ask for a minimum credit score benefiting those who have bad credit but also meet the requirements.
Pros
- Convenient
- Fast application process
- Good customer service
Cons
- High rates
- Eligibility criteria is a bit vague
- Line of credit may be cut off if the financials of the business worsen
- Hard credit check performed
6. Fundation: Founded in 2011, Fundation has created notable traction by offering installment loans and business lines of credit to eligible businesses. While their eligibility requirements are a bit on the higher side, their slightly higher market position compliments fast and reliable service to those who are eligible.
Eligibility Requirements: Fundation’s eligibility depends on the specific loan and the financial strength of your business. Below is a basic structure of prerequisites:
Minimum criteria for loans between $20,000 – $100,000:
- Time In Business: 1 year
- Personal Credit Score: 660
- Business Revenue: $100,000 per year
Minimum criteria for loans between $101,000 – $200,000:
- Time In Business: 2 years
- Personal Credit Score: 680
- Business Revenue: $200,000 per year
Criteria for loans above $200,000:
- Time In Business: 5 year
- Personal Credit Score: 720
- Business Revenue: $500,000 per year
7. Biz2Credit: An online lending platform, Biz2Credit connects borrowers with eligible lenders.
Eligibility Requirements: Since this platform connects borrowers with lenders, there are no set eligibility criteria; each lender has their own criteria. Generally, however, the business must have been in business for at least 6 months with “decent” revenue.
Pros
- Quick application process
- Exceptional customer service
- Wide range of lenders
- Diverse products
- Special focus on women entrepreneurs
Cons
- Slightly expensive
- Additional fees
As the business world continues to embrace the quick and convenient solutions provided online, outside bank avenues to secure a line of credit are growing increasingly more popular. And with the inability of 80% of smaller businesses to secure traditional credit, many are opting for these services.
However, securing funding-no matter the avenue-will require you to provide sufficient documentation illustrating your current financial position. Whether you need help bringing your P&L up to date, organizing your tax returns, or even guiding you to understand your balance sheet, our team has you covered.
As reputable bookkeeping and business advisory providers, we here at MCDA CCG, INC.-located in Placentia, Orange County, California- can help you come up with the best strategy when approaching funding avenues.
The call is free, pick up your phone today!