Most businesses do not rely exclusively on their revenue or cash reserves to sustain their operations and achieve their business objectives. When revenue is increasing and liquidity is needed immediately, many owners turn to a business revolving line of credit (LOC) to access the capital they need when they need it.
A business line of credit is a form of financing created specifically for businesses. They can use these LOCs to cover a number of routine expenses, including one-time expenses and ongoing working capital needs to support their operations and help them achieve their business goals.
Unlike a business loan, which lenders disburse in a single, lump-sum payment that businesses must repay over the course of a defined period of time, LOC’s are revolving credit lines that work similarly to a credit card. Businesses can spend money from their LOC whenever they need it and repay borrowed credit based on what they use. Once the LOC is restocked, they can access funds again later.
Borrowers only pay interest on the amount they’ve used, so diligent management of their lines of credit can help them keep their debt costs low while giving them access to a stable, ongoing source of capital.
Business LOCs offer owners significant advantages that help them run a successful business. These include:
Businesses should consult with a qualified financial advisor before making any decision to apply for financing. A financial advisor will take the time to understand each company's unique business objectives and financial needs to help them determine the financing option that is right for them.
There are two main types of business lines of credit: secured and unsecured. Each option has distinct advantages and disadvantages that businesses should understand before deciding which one is right for them.
A secured business credit line is backed by collateral, which lenders will request at the time of application. Secured credit lines are considered short-term credit options, so businesses do not have to put up assets like their property holdings as collateral. Instead, most lenders only require short-term assets (like a business’s accounts receivables and inventory) to secure the LOC. Failure to repay the LOC in full could result in asset seizure.
Since they are backed by tangible assets, secured credit lines often have fewer restrictions for the business owner and require a lower credit score to obtain. They also tend to have a lower interest rate. That makes them a good option for newer businesses that don’t have a long credit history or have more difficulty demonstrating stable long-term growth.
By contrast, unsecured lines of credit do not require businesses to put up collateral to obtain the LOC. Unsecured LOCs can be highly advantageous for businesses because it means they do not have to risk losing their valuable assets if they are unable to repay the money they borrow. Unsecured LOC’s can also be a great option for newer businesses or start-ups that do not have the assets needed to obtain a secured loan with better terms.
Because they lack collateral backing, unsecured business LOC’s are riskier for lenders, so they often have a higher interest rate and less favorable terms for the borrower. They can be more difficult for businesses to obtain, and lenders often prefer to dispense them to more established firms with better track records of on-time payments, strong operating performance and good debt management.
Follow these steps to apply (and receive credit approval) for your secured line of credit — fast.
Before applying for a LOC, take the time to understand the specific financing needs of your business. Evaluate the entirety of your business operations and pinpoint the areas where you are in most need of financing. This will help you narrow your search and identify the financial products that are best equipped to support your needs and goals.
You should also understand when you need financing. If you need a large amount of immediate cash to help you fund a business expansion, for example, a LOC is unlikely to meet your needs. Ongoing access to capital to complete payroll requirements on time, on the other hand, is better served by a business LOC.
As mentioned above, different types of LOC’s have different eligibility requirements. Before applying for a LOC, it’s important to understand your entire business and financial profile so you can more easily identify the financing options you are eligible to obtain.
Generally, when determining eligibility, lenders will want to assess both your business and personal credit score, the amount of time you’ve been in business, and whether your company has a stable and secure revenue stream. They want to evaluate your creditworthiness to determine if you can repay your debts in a timely manner.
Once you have identified your financial needs and goals and have assessed your eligibility, you can begin searching the market for suitable product options.
When comparing different types of financing, it is important to consider not only the amount of credit you could access but also the interest rate, fee structures, and withdrawal limits. While the total amount of capital offered by one product might be higher than others, stricter terms (like a lower credit limit and higher interest rate) might put you in a more disadvantageous financial position later.
As part of the LOC application process, lenders will likely request a host of financial and personal documents to better understand your business and assess your creditworthiness. Some of the documents your lender will likely request may include the following:
Ensure you have these documents (and others requested by the lender) prepared and updated in order to ensure the application process goes as smoothly as possible, minimizing the potential for disqualifying mistakes and increasing the chances of obtaining the capital you need.
Fill out the LOC application to the best of your ability. Providing as much information as you can during the application process can help reduce processing delays and shorten the time it takes for you to gain access to capital. You may be asked to provide additional information regarding the collateral you are using to secure the LOC, depending on the type of credit for which you’re applying.
Processing times can vary considerably depending on the lender. You might receive an approval within minutes of submitting your application from some institutions, while other lenders might take several days (or even weeks) to provide a response.
A stable, reliable source of credit is essential for success in today’s business environment. While there are numerous credit options available, it can be difficult for businesses to evaluate the market and determine which option is right for them.
Our team of Relationship Managers at Cathay Bank is ready to learn about your business and help connect you with the financing options that are right for your company. Contact our team today to learn more.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.