Ballpark Estimate: Interest plus as much as $150 a year in annual fees
Running a successful company requires more than having a good head for business. You’ll also need easy access to an extra cash flow that you can tap into as needed in order to help you bridge those difficult financial gaps.
Do you need a way to cover your business bills while you wait for customers to pay you? Do you want to invest in new equipment to grow your business but aren’t sure you can afford it? Are you going through a slow period and need some extra help now just until things pick back up?
In many business scenarios, a line of credit can be the answer. Since many businesses are cyclical, there are apt to be highs and lows throughout the year, and you’ll want to have some security that you can count on should you find that business is especially slow. Just keep in mind that you don’t want to borrow the money unless you know you’ll be able to pay it back, along with any fees and interest that accrue.
How Payments Work
While a conventional bank loan allows you to borrow a certain amount of money and pay in back in agreed upon installments with interest, a business line of credit is a little different. In the latter case, the bank extends you the privilege of borrowing the money, but you don’t have to touch it, or pay on it, until you need it. Further, business lines of credit are usually meant for short-term usage. That’s why some banks will require you to pay the balance off completely at least once during the term of the line, or even more frequently in some cases. You can also usually draw on the business credit line, repay it, and draw on it again as long as you follow your line’s specific requirements. In addition, you may also have some flexibility in terms of how and when you pay the business loan back, such as by making the minimum interest-only payments on a scheduled basis, or perhaps adding extra to help pay off some or all the principal more quickly.
You may like the idea of a business line of credit but wonder how it compares with a conventional business loan. There are actually some pros and cons to each method. For instance, a line of credit can be less time-consuming to get and can be easier to qualify for in some cases. It also gives you more freedom to access the money as needed. On the flip side, a business credit line usually has a higher interest rate than a business loan. This means you’ll need to consider how and when you’ll use the money to determine if the line is the most cost-efficient funding source for your needs.
Credit Line Options
There are two main types of business lines of credit. The first is a secured line of credit, which means that you are guaranteeing the money you borrow against your business or something else that you own. If you aren’t able to pay back the business loan, the bank could take your collateral. You might also opt for an unsecured line of credit. As the name implies, this is a business credit line that doesn’t have anything to guarantee it. In the latter case, the bank probably won’t approve you for near as large an amount as it would on a secured line. The interest rate will also be considerably higher if the business loan isn’t secured since the bank is taking a risk on you.
What To Expect
In order to qualify for a business line of credit, you usually should be in business for at least two years, have bank accounts and credit cards that are in good standing, and also have established a good reputation with your suppliers and other vendors. To prove that your business is solid, you can expect to be asked to provide personal and company tax returns for the past three years, as well as an overview of business expenses and profits. The bank may also ask you to elaborate on your goals for the loan. Your business credit rating will also be a deciding factor to help the bank determine whether you qualify for a business loan and if so, how much it should lend you.
Finding A Credit Line
To find a business line of credit, it’s usually a good idea to start with your own bank since you already have a relationship with them. You can also do a search over the Internet to find other banks and credit unions in your area or online who offer business lines of credit. Many of the larger banks also give business lines of credit to people who meet their criteria. You can try Bank of America, Wells Fargo, Sovereign Bank, Citizens Bank, and iBank, among many others. You can also visit the U.S. Small Business Administration website, which can be a great resource to help you find the right match.
When comparing different business credit lines, you’ll want to know what terms the financial institution offers. Usually you will pay a fee to take out the business line of credit, plus you’ll need to know what the interest rate is. Some banks charge a fixed interest rate, while others have an adjustable rate that changes depending on what prime is. Sometimes you can also get a discount on the rate by having a business checking account with the bank and/or having your payments automatically deducted.
Cost For A Business Credit Line
What you will spend on a business credit line will depend on what type of loan you get, the size of it, and how good your company’s credit is. The interest rates for lines of credit are usually based off the Wall Street Journal Prime Rate, which is an important benchmark that’s calculated by the fed fund rates. As of August 18, prime was 3.25 percent. But this rate can vary a great deal over time.
Range Of Rates
- If you’ve been in business for a while and established a good reputation for yourself and have a high credit rating, you may be able to qualify for a great rate, which can be as low as a point or two below prime.
- For many business lines, the credit interest will be around prime, or prime plus up to a point above.
- On the other hand, if your credit rating is low or your business is too new to have much of a track record, you can expect the interest rate on your business line to be high. It can be anywhere from few points above prime up to about 10 points above.
The interest on a business line of credit could cost an average anywhere from a point above or below prime for a business with good credit. (Fees are extra.) If prime is 3.25 percent, this means you might pay between 2.25 and 4.25 percent of the total amount on interest. But if you have poor credit, your business credit line could be as high as 13.25 percent interest or more.
- Cost to open the business loan credit line can be between $100 and $250, or some banks will charge 1 percent of the line amount up front.
- Some business credit lines also have a yearly fee which can cost up to $150.
- If your payment is late, you can expect to pay a penalty price of between $15 and $75.
- With a missed payment, you can expect your rate to increase considerably. You may pay as much as 25 to 30 percent over prime in such a case.
- If you go over your business credit line maximum, you may also be charged a penalty. This can cost between $25 and $50.
While a business line of credit can be an important asset to many companies, in today’s challenging economic climate, it can be more challenging to qualify. If your company hasn’t established good enough credit to be granted a business line of credit, you might want to look into opening up a business credit card instead. While the interest rate on a credit card can be higher (typically ranging from about 7 to 22 percent), this can still be more appealing than a line of credit if you need more time to pay back what you spend. You also won’t need to secure any collateral against the credit offered through the credit card. In addition, you can usually apply for, and receive, a credit card fairly quickly, making this a very feasible option to consider.