Business Line of Credit

Secured business line of credit. This type of line of credit requires businesses to put up specific assets as collateral. Since a line of credit is a short-term liability, lenders typically ask for short-term assets, like accounts receivable or inventory.

Unsecured line of credit. While this type of line of credit doesn’t require specific collateral, your lender will likely place a general lien on your business and require a personal guarantee from you. You’ll likely need a stronger credit profile to qualify and interest rates may be higher. Additionally, keep in mind that unsecured lines of credit typically come with a lower credit limit.

Revolving line of credit. With this type of line of credit, you replenish your available funds as you repay what you borrow. This gives you access to future funding without needing to reapply. OnDeck’s business line of credit is a revolving line of credit.

Non-revolving line of credit. A non-revolving line of credit is just like a revolving line of credit except your available funding doesn’t replenish as you make payments. You’re given a capped credit limit, and when you reach that amount, you exhaust your funding.

A business line of credit and a business credit card are popular, flexible financing and purchasing tools used by business owners when they need quick access to cash. They provide a fixed amount of money that can be accessed as needed. You can borrow up to your limit, repay, then use the funds again.

A business line of credit can be used to make purchases and payments that you can’t use a credit card for. For example, you may not be able to use a credit card for payroll, your property lease or invoices from vendors. Additionally, business lines of credit often come with a higher credit limit.

A secured line of credit requires a business's assets as collateral to secure the line. In the event the borrower defaults, the lender can take possession of the asset. Assets can include things like real estate, equipment, inventory, accounts receivable or cash accounts.

An unsecured business line of credit does not require a business to pledge assets as collateral to secure the line. Unsecured lines of credit typically require the business owner to have a strong credit profile and credit score, along with a positive business track record to qualify. In general, unsecured lines of credit have slightly higher interest rates and line sizes are relatively smaller.

To provide flexibility, OnDeck’s line of credit is unsecured.

Applying for a line of credit is similar to applying for a loan. Lenders will want to see financial records and other documentation that show your business is able to take on debt.

It’s a good idea to gather all the necessary information before you apply for a line of credit. Some basic information you need could include:

• Your Business Tax ID number (EIN)
• Your Social Security number
• Estimated annual gross revenue
• Three months of bank statements average bank balance

Consider speaking with your accountant to make sure you’re familiar with these documents. Your lender may have questions and you’ll want to be prepared to discuss the financial health of your business.

Before you open a line of credit, make sure you understand your lender’s qualification criteria, conditions, interest rates and fees. You may be charged for account set-up, transactions or annual fees. Some lenders may waive certain fees for the first 12 months, but you could still be hit with them the following year.

Some lenders may require you to pay down your outstanding balance to $0 at some point during the year. This helps the lender minimize risk and reassures them that your business is not relying on the line of credit as a substitute for cash flow.

Because of the unpredictable nature of the market, your lender may reserve the right to call in payment immediately. This means the full balance of the line of credit would need to be paid. This can happen without warning so you should always be prepared to either replace the line of credit or scale back to weather the loss of credit.

• Covering payroll
• Hiring more employees
• Purchasing inventory
• Repairing business-critical equipment
• Financing a marketing campaign
• Bridging a seasonal cash flow gap

A line of credit can be helpful if you find yourself needing ongoing access to funding to meet short-term needs and day-to-day expenses. Here are few situations where a line of credit could be helpful:

• You own an ice cream shop that makes most of its sales during the summer. In the offseason you use a line of credit to help cover the overhead until next summer. The line of credit helps keep your business running smoothly even though your income fluctuates.
• You want to start a marketing campaign. You use a line of credit to give yourself some financial flexibility and are able to pay off the debt quickly because of the new business your campaign brought in.
• You are waiting on clients to make payments on their invoices. You use a line of credit to manage your cash flow so you can offer your customers flexibility and keep your business running.

Most lenders prefer to offer a line of credit to more established businesses with a strong track record and revenues to support the more flexible financing provided by a line of credit.