Business Line of Credit: A Guide for Small Business Owners

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Business Line of Credit: A Guide for Small Business Owners

Are you eligible for a line of credit from your preferred financial institution? A line of credit is access to capital from an institution that you'r

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Are you eligible for a line of credit from your preferred financial institution? A line of credit is access to capital from an institution that you’re able to borrow from and repay. In that sense, a line of credit operates like a credit card or a checking account. We believe having a line of credit is a fantastic funding solution for small business owners. We’ll be discussing what you need to know about lines of credit as a small business owner. 

This blog post may contain affiliate links which means we get commissions for purchases made through links in this post at no extra cost to you.

What is the Difference Between a Line of Credit and a Loan?

There are several differences between a line of credit and a loan. For example, if you take out a $20,000 loan for your business, even if you need it all upfront, you are given it upfront anyway. On the other hand, if you have a $20,000 line of credit, you can use what you need and repay that sum. 

According to Investopedia, another clear difference between a line of credit and a loan is what you can use them for. A line of credit can be used to purchase anything, usually for smaller purchases. On the other hand, a loan has a set purpose. For example, a mortgage loan for your brick-and-mortar location must be used to pay the mortgage. A line of credit can be used to pay rent, buy supplies, pay for courses, or anything else you need it for. 

You should also be aware that your line of credit isn’t unlimited. Your financial institution will assign you a credit limit. For example, if you’re given a $15,000 limit, you can use that money in increments. You can repay the money you used and then use it again. In addition to that, interest is only due when accrued when you use the money or withdraw cash. You’re given a lump sum with a loan, and interest is accrued immediately.

loan application form

Another difference, according to Investopedia, is that lines of credit typically have higher interest rates. However, they have smaller minimum payments than a loan. 

What is similar between a line of credit and a loan is the importance of your credit. Investopedia states that your credit score, financial history, and relationship with the lender are essential when accessing either financial product.  

Why Small Business Owners Need a Line of Credit

Have you ever seen a business opportunity you wanted to take advantage of but didn’t have the cash? Did you run into unexpected expenses you couldn’t pay for that hurt your business?

If you did, you’re not alone. Many small business owners struggle to have available capital to spend. 

However, access to capital is paramount to running a business. Investopedia states that lack of capital is one of the biggest reasons small businesses fail. They said that running out of money is the biggest risk a small business faces. 

Therefore, small business owners must explore their financial options. You have probably heard that you can just get a personal line of credit or a personal loan. However, believe it or not, the traditional financing institutions have already begun getting rid of them. 

That’s why we recommend getting a business line of credit. A line of credit can help you:

Scale Your Business

Lines of credit can provide you with what you need to scale your business. For example, you know that contracts are one of the best ways for you to scale your business. But you have to meet the terms of those contracts. And often, it requires you to purchase material or equipment before it even starts. Unfortunately, contracts often don’t provide you the money upfront. Therefore, if you have a line of credit, you can use that capital to take advantage of opportunities like that. 

Cover Everyday Expenses

Sometimes, you just need capital to keep your business afloat. You may need to pay rent, pay for supplies, order new stock, or anything else to keep the lights on. 

Lines of credit can really support your small business. They can be used for unexpected challenges and opportunities that small business owners face daily.

Build Your Business Credit 

Finally, lines of credit can help you to build your business credit. Financial institutions still look at your credit profile before offering you a line of credit. However, even if you get a line of credit with a small amount, you can build your credit and access even greater opportunities. 

How to Qualify for Lines of Credit

To qualify for a line of credit, your business must be bankable. Here is an essential list of requirements you’ll need to satisfy to qualify for lines of credit:

Have a Registered Business

 Your business needs to be legally registered in the state in which your business is operating. If your company operates in more than one state, it must be registered in more than one state. You’ll therefore need to have your articles of incorporation. 

If you’re new to the business world, you can check out our Quick Start Guide & Small Business Checklist to help you get started in the United States. This checklist takes you step-by-step through the process, identifies which agencies/organizations you need to connect with, and includes hyperlinks to those agencies.

Get Your EIN

Your EIN is your employer identification number or your business tax ID. It’s a social security number for your business that follows your business through the life of your business. You are often asked for this number when you’re applying for different opportunities, such as applying for a line of credit. 

Create a Business Bank Account 

Many small business owners lose out on opportunities because they don’t have a business bank account. 

You’re not supposed to be commingling funds. That means you shouldn’t have personal transactions on an account you’re using for your business. 

Financial institutions will not loan you money or give you a line of credit if you do. 

bank account application form

So if you do not have a business account, we highly encourage you to prioritize getting a business account. There are many business bank accounts that you can open for zero to little money. We’ve seen many businesses get turned down for stimulus and money grants because they did not have a business bank account. And when you’re looking at getting funded thousands and thousands of dollars, the expectation is that you have a business bank account and that you are legally transparently operating your business.

Make Sure Your Business is Credit Worthy

When you’re applying for lines of credit or any other types of capital, they’re looking at your credit score or your personal FICO credit scores. Institutions want to know you as the business owner and your relationship with money. The more you build your creditworthiness, the easier it is for you to access funding.

Where to Get a Business Line of Credit

Many institutions offer a business line of credit. It’s up to you to determine which ones work for you and your business needs. However, we have some recommendations we encourage you to explore. 

David Allen Capital

First on our list is David Allen Capital. We’re affiliated with and highly recommend them. They give business credit up to $100,000, which is excellent for a small business. The requirements to get a line of credit from this institution are:

  • A minimum 550 FICO score 
  • Minimum of $15,000 in sales per month
  • Be in business for at least two years

Just to be clear, these are the minimum requirements. However, just because you meet all the requirements doesn’t mean you’ll automatically be granted a line of credit. Also, if your business is younger than 2 years old and you have excellent credit, you may be a successful applicant. They’ll be looking for a credit score of over 600. 

If your business resides in New Jersey, California, Rhode Island, Nevada, Vermont, or Montana, then your FICO score must be over 600 as well.

On a more positive note, you can take out all your money at once or in increments. You’ll also have a year to repay the money, which you can do with automatic weekly payments. 

David Allen Capital is interested in funding the 80% of small businesses that get rejected by traditional financial institutions. If your company has been denied by a traditional institution, give David Allen Capital a chance. For more information, check out their website. 

Divvy

If you’re looking for another institution to get a business line of credit, we recommend Divvy. Some of the benefits of using Divvy are:

  • No annual fees
  • Flexible rewards
  • Automatic and seamless expense management with Divvy software
  • Access to virtual cards for greater control of your online purchases and subscriptions
  • Set budgets to control spending 

When we first applied for this program, we had to use a minimum of $500 per month. However, for many small business owners, this is doable. 

One remarkable thing about Divvy is its credit-building program. This is perfect if you’re not ready to access credit or your credit score needs repair. 

For more information, you can visit their website here. 

Next Steps

We’re encouraging all small business owners to get their business bankable and eligible to apply for lines of credit. You never know when you’ll need them. Continue to read and do your research so that you can select the best option for your business. Share this post with your network so they can be informed too. 

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COMMENTS

WORDPRESS: 6
  • comment-avatar

    This was very helpful.I have been getting different information when it comes to being a Sole proprietor and becoming an LLC. If you don’t have over 100,000 in assets, you shouldn’t be putting yourself in a higher tax bracket (per Accountants). I need a seat at the table when it comes to advocating for real sole proprietors. I pay taxes and have expenses just like an LLC. All the requirements the state have put in place; I jump through those hoops also. I just don’t think the playing field is level and it should be brought to the Power’s to be attention. IJS

  • comment-avatar
    Breanna King 4 months ago

    OMG 😱 thank you sooo much SheBoss the last time we talked this was my biggest problem! Thank you Thank you thank you! Now question? how do you bring your business credit up?

    • comment-avatar

      Thanks for leaving a comment! DIVVY Build Credit Builder Program will help divvy.sjv.io/MXLzMq

      Get a DUNS number
      Open Net 30 accounts like Uline
      Have an active business account in business name

      Start there.

  • comment-avatar
    Breanna King 4 months ago

    OMG  thank you sooo much SheBoss the last time we talked this was my biggest problem! Thank you Thank you thank you! Now question? how do you bring your business credit up?

  • comment-avatar
    Angela Roberts 4 months ago

    Thank you for this article. Are there anymore companies you would recommend for a small business owner less than 10,000 per month?

  • comment-avatar

    I really appreciate all the information provided in this article. Thank you for the support.

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