Business Banking. Business Line of Credit
While credit cards are great for rewards and short-term borrowing, when it comes to drawing cash or long-term borrowing the high interest rates can wreck the havoc on their working capital. Luckily there are other products offered by banks. Line of Credit, similarly to a credit card, is a revolving loan but it has some key distinct features:
It has a lower interest rate.
There are typically no fees or limitations to draw cash from the line.
No rewards are typically offered on transactions.
The interest is accrued from the day the money is borrowed and there is no grace period to make a payment and avoid interest.
The primary use of line of credit is to bridge the gap between payables and receivables. For example, if the company gets paid by customers once in a month but has to pay employees every 2 weeks it may encounter cash shortages that can be filled by line of credit.
When considering a line of credit request the bank will look at the following factors:
The revenue of the business (typically the line of credit will be in a range of 10% of the revenue)
Net profit
Length in business (typically at least 2 years under the same ownership is required)
Assets of the business (typically the business must have some reserve working capital to qualify)
The business credit score
The credit score of the guarantor(s)
The purpose of the line of credit (the primary use of line of credit is to bridge the gap between receivables and payables. It cannot be used for non-business purposes or left inactive for too long. Most retail businesses will not qualify for a line of credit since they get paid upfront and have no account receivables.
The industry of the business. High risk industries will be scrutinized more heavily or be outright rejected.
When choosing a line of credit lender companies should consider the following:
interest rates
origination fees (some banks charge a one-time fee when the loan documents are signed)
annual fees