A term loan is a practical alternative to a small company loan since it provides financing on a “need-to-know” basis rather than a lump-sum payment. Using a business line of credit might help you better manage your cash flow, make purchases, or cover other unplanned costs. Even better, you’re only charged interest on the money you borrow, not on the whole amount of your credit limit $200 funded at Ipass.
While the application procedure differs by lender, you may generally follow these steps to get a business line of credit.
1. Determine the amount of funding you need
When applying for a business line of credit, you must first establish the amount of credit you need. Loan amounts vary by lender but are commonly between $2,000 and $250,000. Because you only pay interest on what you use, it’s fine to request a greater credit limit than you’ll likely needâas long as you don’t get greedy and spend more than you can afford.
To get extra money, you may ask for an increase in your credit limit after acquiring your initial credit line. The lender may accept your request or require collateral (anything of value that the lender may take if you fail on the line of credit) to secure the line of credit, depending on your firm’s revenue and credit history.
2. Verify Your Qualifications
While lenders assess a variety of parameters, there is a critical handful, including the following:
Your credit history demonstrates your propensity toward defaulting. While most lenders need a personal credit score of 680, lenders accept scores of 580 to 600. The higher your credit score is more likely you qualify for a reduced interest rate and a significant loan amount.
Revenue generated by a business. Most lenders want a certain amount of yearly or monthly company income. This varies per lender but may range from $10,000 per month to $250,000 per year. In general, online lenders have less stringent revenue standards than conventional banks.
Time is business money. Most banks demand one to two years of operation, although some internet lenders may require as little as six months. The longer your firm has been in operation, the more stable it seems to prospective lendersâand the lower the interest rate you may obtain.
3. Conduct Lender Research and Comparisons
Once you’ve determined the amount of funding you need and your eligibility, it’s time to look for lenders that match that criteria. Additionally, examine the maximum loan amounts, payback periods, minimum standards, and APR ranges of various lenders.
There are many different sorts of institutions through which you may apply:
Financial institutions such as banks and credit unions. Traditional lenders are often the best options for company owners with excellent credit ratings, significant business histories, and a sizable yearly income as banks and credit unions. New enterprises may be unable to get loans from these banks.
Lenders online. Online lenders are ideal for entrepreneurs with weaker credit ratings, shorter company histories, and lesser income. Since internet lenders often allow riskier customers, interest rates may be higher than those offered by banks and credit unions.
4. Compile Necessary Documentation
Once you’ve identified a lender that meets your criteria, it’s time to assemble the relevant documentation for the official application procedure. Typically, this will contain the following:
- Individual and corporate income tax returns
- Licenses for businesses
- Incorporation articles
- Bank statements for individuals and businesses
- Reports of profit and loss
- Accounts financiers
- Business strategy
- Lease of a building
If you have any questions about the documentation required, contact the lender before applying.
5. Submit Your Request
Finally, either online or in-person, submit your application. Turnaround times vary per lender and range from five minutes to many days. Additionally, your lender may demand extra paperwork after assessing your application.
Specific information that your lender may want includes the following:
- Your given name
- The business’s name
- Number of the Social Security Administration (SSN)
- Loan amount desired
- The objective of the loan
- Tax Identification Number for Businesses
- Revenue on an annual basis
If your loan application is accepted, the lender will give you a loan agreement to sign before establishing your line of credit.
Common Errors in Business Line of Credit Application
When submitting a company line of credit application, accuracy is crucial with any other kind of loan. Before submitting, double-check your phone numbers, email addresses, and further essential details. If you make a mistake, you risk prolonging the process or endangering your chances of being approved.
When displaying your contact information, utilize a regularly checked email address or phone number. The lender may contact you with more questions, and you mustn’t miss a phone call or email from the lender.
Costs & Fees of a Typical Business Line of Credit
A business line of credit lenders imposes a range of fees and penalties. Compare costs and interest rates before applying to guarantee you’re receiving the best deal.
Rate of Interest
When you remove funds from your business line of credit, you will be charged interest on the amount taken. Variable or fixed interest rates are available: A fixed rate will remain constant for the loan duration, but a variable rate will change in response to the general market interest rate. Rates usually vary from 10% to 99%.
Fees for Drawing
Specific lenders may levy a draw fee, which is charged each time the line of credit is drawn. The draw charge varies per lender but is typically between 1% and 2% of the total amount withdrawn. For instance, if your line of credit has a 2% draw fee and you start at $10,000, the price is $200.
Fee for Payment Processing
Accessing your company line of credit will almost certainly incur a payment processing charge if the funds are sent by wire transfer. Typically, this cost ranges between $15 and $35. Generally, you may avoid this cost by using regular ACH processing, but you may have to wait one or two business days to get your payments.
Fee for Late Arrival
The lender will often levy a late fee if you miss a payment due date. This is often expressed as a percentage of the payment amount and varies according to the lender.
Fee for Termination
Typically, a line of credit has a specified maturity date. If you choose to terminate the line of credit before that date, you may be required to pay a termination charge of between 1% and 2% of the loan amount. Not all lenders, however, levy a termination fee.
Penalty for Prepayment
If you repay the borrowed funds ahead of schedule, some lenders may assess a prepayment penalty of between 3% and 5% of the balance. Seek a lender that does not impose a penalty for early repayment.
Leading Commercial Lines of Credit Lenders
Are you looking for a line of credit for your business? The following is a list of the best online business line of credit lenders.
BlueVine provides business lines of credit ranging from $5,000 to $250,000. Interest rates begin at 4.8 percent. Six or twelve-month terms are available. To qualify for a BlueVine line of credit, you must have a personal credit score of a00, monthly revenue of a10,000, or yearly income of a120,000, and be in business for six months.
OnDeck provides loan lines ranging from $6,000 to $100,000 with 12-month repayment terms that reset with each withdrawalâpayments are due weekly. To qualify for an OnDeck line of credit, you must have a personal credit score of at least 600, a company gross annual revenue of at least $100,000, and have been in business for at least a year.
Kabbage offers company credit lines with terms ranging from six months to 18 months, with sizes varying from $1,000 to $150,000. At the very least, you need to be in business for at least one full year to be qualified for a Kabbage credit line. Kabbage does not disclose its yearly revenue requirements.