Guide to Obtaining a Small Business Line of Credit

July 28, 2020

Written by

Multiply Team

Why Consider a Business Line of Credit?

A business line of credit offers businesses a flexible financing option to cover working capital expenses or finance growth opportunities. A line of credit allows you to withdraw fund at any time up to a set limit, and only pay interest on what you draw.

Be it covering rent, paying payroll, buying new equipment or taking on a new project, a business line of credit provides enterprises steady cash-flow, ensuring you can run your business smoothly.

With other forms of financing in consideration, business lines of credit are reasonable to maintain in comparison. The cost of keeping one open is affordable, and interest is only accumulated on the amount you draw.

Considerations when applying for a business line of credit

The most effective way to find out if you qualify for a credit line is to apply, but you wouldn't want to over-apply and come out short. Below are some factors to consider to see if you're qualified for funding.

Credit Score

Typically, lenders will have a look at your personal and business credit score to evaluate the risk factor involved. The stronger your score, the more options you have. Though with a weaker score, you can always apply at other lenders in the circumstances you get rejected at another.

Monthly/Annual Revenue

Lenders will look at your monthly or annual revenue from your income statements and trend of your revenues over time. Your annual revenue is an influential metric lenders consider, as it signifies your ability to sustain and grow your business. Having a healthy yearly revenue increases your chance of  successful application, as well as the opportunity for them to steadily increase your credit line to support the extension of your business.

Business History

The age of your business matters as well. Banks seek companies that are at least two years of age. If you're a considerably new business, between three to 12 months old, do consider alternative lenders as they are more likely to lend to you.

Different Types of Credit Lines

A significant difference between credit lines is the duration of repayment terms.

A short repayment term lasts about six to 12 months, ideal for businesses looking to pay off your line of credit quicker and to save on interest costs.

Long repayment terms last over 12 months. Extended repayment terms are suitable for those seeking more time to pay off the credit or want lower monthly payments.

Short-Term Business Line of Credit

Online lenders are an excellent choice for those seeking to obtain a loan with short repayment terms. Online lenders are typically faster with the application process and can provide access to funds on-demand. Since the repayment terms are shorter, the requirements aren't as rigid as well.

Long-Term Business Line of Credit

A conventional bank would be more suited for those seeking to get longer repayment terms.

To qualify for a bank line of credit, you should have excellent business financials (steady cash flow, high revenue, and little to no existing debt).

You will also require all of the relevant documents, so be sure to prepare them. Related papers include, but are not limited to, historical financial statements, balance sheets, tax returns, and income statements.

Once you've settled your documents, you may begin to apply and wait. Expect to wait at least a couple of months before reaching a decision.

Benefits of a Business Line of Credit

Business lines of credit only charge interest based on the amount drawn by the borrower; compared to business term loans, which charges interest based on the principal loan amount. As such, a business line of credit helps to save businesses money in terms of interest rate payments.

This method of flexible financing provides businesses with the opportunity to repay and redraw frequently, usually sans fees or early full repayment. Lastly, most lines of credit are unsecured, which means borrowers do not need to provide collateral.

Disadvantages of a Business Line of Credit

Business term loans usually offer higher funding as compared to lines of credit, and in turn, lower interest rates.

Companies seeking to utilise lines of credit have to be cautious not to borrow more than they need, as it will result in high-interest rate payments. In Singapore, regular banks tend to be the only providers of business lines of credit. Hence, startups and SMEs that do not meet the banks' eligibility requirements may not be able to receive business lines of credit.

Line of Credit

Which SMEs Should Consider a Business Line of Credit?

Businesses seeking flexible financing to solve short-term cash-flow woes can consider utilising a line of credit if they meet the bank's requirements.

Using a line of credit instead of a term loan can help to reduce interest rate payments by only paying the interest incurred on the amount drawn. Businesses capable of repaying their loans promptly can save money with a business line of credit compared to a term loan.

What if I am Uneligible?

For those seeking to improve a short-term cash-flow crunch, there are other options.

Invoice factoring one way you can improve cash-flow. Read more about invoice financing here.

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Multiply Team

Multiply brings a fresh perspective to financial services. We offer simple and flexible financing for smaller businesses.

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