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Updated: March 27th, 2020
A small business line of credit can be a great option for business owners looking for short term financing. The ability to withdraw funds when you need it is ideal for seasonal businesses with an irregular cash flow.
Having a small business line of credit you can tap into whenever you need a boost of capital can bring you peace of mind, which is invaluable when you’re a small business owner. Additionally, most small business line of credit lenders do not charge prepayment penalties, meaning you can pay back the loan early (and limit the amount of interest you’ll pay) without any additional charges.
However, it’s important to keep in mind that the best option will depend on your specific situation. Before you take the plunge and apply for a small business line of credit, take stock and ask yourself three key questions. This process will save you time and money (literally) down the line.
It doesn’t make sense to spend your precious time applying for a loan that you have little chance of qualifying for. While some business owners blindly apply for multiple streams of credit, it’s usually better to take a more focused approach.
Obviously we’d all like to get approved immediately for a large amount at the best possible rate. However, this rarely happens, even for those with an impeccable credit history and in an ideal financial position.
More often than not, the loans with the lowest interest rates require the most amount of documentation, the highest credit scores, and the strongest business models. Before applying for a business line of credit, make sure that you meet the minimum qualifying criteria so you don’t waste your valuable time.
Before applying for a small business line of credit, it may be helpful to consider not only what its credit requirements are, but also whether there are other options that are a better fit for your needs.
If you need money right away, a merchant cash advance (MCA) could be the best selection. This is where the lender gives you a lump sum in return for an agreed percentage of future debit/credit card sales. However, the rates for MCAs can be extremely high, so make sure you can afford the cost.
If you have time to wait and a clean financial history, you might want to consider an SBA loan. While it requires a lot of documentation and can take months to process, the interest rates can be significantly lower than some other options.
Term loans are one of the most common business financing options. With these types of loans, you get a lump sum deposited into your bank account, and in return, you pay back the loan in monthly installments along with interest. Terms loans are classified by their length into short, medium, and long term loans.
Before rushing to apply for a loan, make sure you consider the long term implications and carefully weigh your options. For example, ask whether the lender reports your repayment activity to a credit bureau such as Experian or Equifax. If they do, this can be a great way to build your credit so you score better rates down the line.
Just because you meet small business line of credit requirements doesn’t always mean that you should apply. Before taking on any form of debt, make sure you’ll be able to pay it back. If you end up falling behind on payments, your credit could suffer and make it harder for you to grow your business in the future.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.