A business line of credit (LOC) is a revolving loan that gives business owners access to a fixed amount of money, which they can access when they need extra cash, repay, and use again as needed. A LOC has traditionally been one of the most popular options for meeting short-term capital and cash flow needs for small business owners.
A few examples of how your business can use a business line of credit:
- Purchasing inventory
- Repairing business-critical equipment
- Financing a marketing campaign
- Bridging a seasonal cash flow gap
A Business Line of Credit Comes in Two Varieties:
- Secured Line of Credit: This type of LOC includes a collateral requirement to secure the credit line. When a line of credit is secured, the creditor usually holds a lien on one or more of your business assets as collateral. A secured line of credit works much the same way as an auto loan or a second mortgage on a house. A secured LOC often comes with a lower interest rate and may also include a higher spending limit.
- Unsecured Line of Credit: There is no collateral requirement for this type of LOC. An unsecured line of credit works much the same way as a credit card. Approval is typically based upon your credit score and the interest rate will likely be higher than a secured credit line. The spending limit will also likely be less.
An Open-End, Revolving Line of Credit
Although many lenders assign a term to a LOC, a business line of credit could be considered an open-end line of credit. In other words, the line of credit can be used up to the approved spending limit, repaid, and used again. Another term for open-end credit is revolving credit. Credit cards are a good example of an open-end credit line. A minimum balance payment is due every month as new charges are added to the balance.
Unlike a traditional small business loan, interest is paid only on the amount of credit used, as long as you make the minimum monthly payment. You can pay back as much over the minimum monthly payment as you choose every month until the end of the loan period, when the entire principal amount is due.
Is an OnDeck Line of Credit Right for Your Business?
A line of credit is a great solution if your business regularly has short-term cash flow needs. The flexibility to access capital when needed, pay off the balance, and use the line of credit again in the future is very appealing to many small business owners. Unfortunately that same flexibility makes it difficult for a traditional lender like a bank to underwrite unless the business owner has exceptional personal credit.
We believe there is more to a small business owner than his or her personal credit score and look at multiple data points to help determine if a line of credit is right for your business—resulting in higher approval rates and greater access to this important small business financing tool.
When Should a Business Consider a LOC?
If your business regularly requires access to funds to meet short-term capital needs to manage the business’ day-to-day capital requirements, then applying for a LOC might make sense. Here are a few examples of situations where a LOC could be a good idea:
Example #1: A seasonal business that generates most of its sales in the summer could use a LOC in the offseason (provided they had the cash flow to make the periodic payments) to help cover overhead as they bridged from one season to the next. The LOC could allow them to maintain normal business operations even though their income fluctuates.
Example #2: A small business could use a LOC to finance a marketing campaign, which would attract new customers and expand sales. The borrowed funds could be paid off quickly because the campaign would potentially generate additional revenue.
Example #3: If a business needed to cover expenses while waiting for a client to make payments on an invoice, a LOC could be useful for cash management.
A new business without an established business credit profile or a business owner with a low personal credit score will likely have a difficult time qualifying for a LOC. Most lenders prefer to offer a LOC to more established businesses with a track record and revenues to support the more flexible financing provided by a line of credit. With that being said, applying for and accessing a line of credit with OnDeck is simple and straightforward:
- Apply Online: A fast and easy application that only takes a few minutes to complete or you can call (888) 269-4246 to speak with one of our US-based Loan Specialists Monday-Saturday.
- Draw Anytime: Draw funds whenever you need and we’ll deposit directly into your bank account.
- Early Payback: Pay back the balance via automated weekly debits, scheduled over six months. The funds are available to draw again as soon as they’re paid back. You only pay interest on the credit you access and there’s no penalty for early repayment.
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Minimum qualifications for approval
We’ll evaluate your business criteria to help find the loan that’s right for your business.
- Time in Business
At least 1 year in business
- Personal Credit Score
- Annual Revenue