A  line of credit is a type of short-term business financing that allows your business to borrow a certain amount of money on a flexible basis, and repay the borrowed money at any time. It works similarly to a business credit card: just like a credit card is approved for a certain credit limit, a line of credit offers a certain amount of money that the business is eligible to borrow, but you can borrow as much or as little as you need within that available limit.

Business loans provide a one-time lump sum of cash up-front, and typically have fixed payment terms, requiring the borrower to repay the loan in a series of installments at specific due dates over a period of months or years. A line of credit is a type of “revolving” credit account, similar to a credit card. “Revolving credit” means that the line of credit is available as an ongoing source of money and does not have a fixed number of payments; the business can borrow and repay the money on a flexible basis, and as the borrowed money gets repaid, the available credit gets replenished.

Business loans can be utilized for short-term or long-term financial needs – such as covering unexpected expenses or investing in new equipment or facilities. A line of credit is intended to be more flexible and focused on short-term financial needs and ongoing operating expenses.

The amount of money that you can borrow with a line of credit depends on your business’s credit history, your annual revenue, how long you have been in business (and depending the the financing company and the size of the credit line you are looking to secure, there may be other dependencies). But in general, lenders offer line of credit borrowing limits ranging from $1,000 to $250,000. A business loan will often allow your business to borrow a larger amount of money than a line of credit, depending on your goals and financial qualifications.

Getting a  line of credit has several advantages:

• Flexibility – Unlike a business loan, which typically has fixed payment terms and might require a commitment of several years to repay, a line of credit is a flexible source of ongoing financing for your business. You don’t have to keep re-applying for credit when new needs arise; you can just keep using your approved credit line.
• Borrow only what you need – A line of credit enables you to use as much or as little credit as you need, and you can repay the borrowed money on a flexible basis, only getting charged interest on the amounts that you borrow. Many business owners like to have credit available, even if they don’t need all of it. It’s often a smart strategy to get approved for a line of credit even if you don’t need to borrow.
• Use the funds for whatever you need – Your line of credit can be used for any business purpose, unlike business loans which are often designated for specific purchases or capital investments (like new equipment or facilities). No matter what your business needs, a line of credit can provide you with access to quick cash – and you have control over when and how to use that money, without having to get permission from a lender.

This might not be the right financing solution for every situation. Pay attention to some of the possible disadvantages:

• Complex fees – Make sure you understand the full picture of the factor’s fees. Ask if there are any upfront fees or processing fees. Ask if there are weekly fees or if it matters how quickly your customers pay their invoices; some factors might charge a weekly fee that can add up to a significant percentage of the total invoice amount. Depending on your overall cash flow and credit situation, it might be better for your business to borrow money or get a business line of credit than to work with a factor.
• Confusion over who “owns” the debt – Some factors take over “ownership” of your customer’s debt, meaning the factor will take over the responsibility for reminding the customer to pay their bill, and will possibly engage in collections actions if the customer does not pay on time. If you do not want your customers to be contacted by a 3^rd party in this manner, make sure to clarify upfront with the factor as to who really “owns” the debt.
• Communications issues with your customers – If a factor is going to take over ownership and collection responsibilities for your customers’ debt, you might want to communicate with your customers ahead of time to make sure they are aware of the change and to alert them to the possibility that they might get contacted by a factor. This should not be a major difficulty for your customers, but proactive communication will help to make it easier. Give them advance notice and help adjust any payment processes if necessary.

Use a line of credit for short-term financial needs, such as making payroll, handling unexpected short-term business expenses, managing cash flow, or otherwise dealing with the ongoing operational costs of doing business. This type of financing is designed to be flexible and adaptable to your business needs – think of it as a financial safety net to help your business manage the monthly ups-and-downs.

For longer-term purchases and big-ticket capital investments, a business loan will usually be a better option than a line of credit.

To qualify for a line of credit, lenders will typically want to see your business credit score, your business history (how long have you been in business), your annual revenues, and other financial aspects of your business. Some lenders will want you to offer collateral for larger amounts of credit, such as real estate, equipment, inventory, or other property that is owned by the business. You might need to provide bank statements, tax returns, or other financial documentation.

High approval rates for business line of credit

Source: Small Business Credit Survey

Depending on which lenders you apply to, you might be able to get approved for a line of credit almost immediately. Traditional banks tend to have a lengthier approval process that might take several days or a few weeks to evaluate your application for credit. But those banks are not your only option anymore; today there are alternative lenders that look at factors other than credit score. With these alternative lenders, you might be able to get pre-qualified for a line of credit on the same day that you apply – often within hours – and get funded within a few days.

A line of credit does not have fixed terms like a typical business loan. Instead, the most important aspects to consider when looking at a line of credit are the credit limit (the total amount of money that you can borrow via the credit line) and the APR.

The two most important questions to ask about a line of credit are:

1. “How much can I borrow?”
2.  “How much will it cost?”

APR stands for “annual percentage rate,” also known as the interest rate that you pay to the lender on the money that you borrow. The APR of a line of credit ranges widely depending on the lender, the borrower’s creditworthiness, and the specific terms of the account; but in general, you might see APRs ranging from as low as 5% to 30% or more.

The APR of a line of credit depends on a few factors, including:

• Your business credit score (for established businesses) or personal credit score (for new businesses): The higher your credit score, the lower the APR you are likely to qualify for.
• Your years in business and annual revenues: Established businesses with strong revenues will often qualify for lower APRs.
• Size and characteristics of your credit limit: If you want a larger credit limit, you might have to pay a higher APR to borrow more money. If you offer collateral, you might qualify for a reduced APR – because a “secured” line of credit is a better risk for the lender.
• Overall interest rates: APR for a line of credit is also affected by the broader cost of money in the financial system. If interest rates go up (or down), your line of credit’s APR might change too.

In addition to the APR, a line of credit might come with additional fees depending on the lender, such as an origination fee or opening fee, an annual fee, and cash advance fees. Read the fine print and talk with your lender to understand the total picture of any fees, including interest fees, that are incurred with your line of credit.

Different financing options are a better fit for some businesses, depending on your situation. Check out the Kapitus Product Comparison Chart to evaluate your options and decide which features are most important to you. But in general, a business line of credit is often the best choice for businesses that need:

• Fast access to cash
• Flexible borrowing ability and payments
• Help covering general ongoing business expenses
• Financing for short-term expenditures or smaller investments

Invoice factoring can be an ideal option to get cash on a short-term basis. Unlike other forms of financing, working with a factor does not require you to take on debt or sign up for ongoing monthly payments. Instead, it lets you use your unpaid invoices as a form of collateral to get an immediate “cash advance” in exchange for a percentage of the total invoice amount. This financing option can be flexible and fast, however it also requires you to understand the full picture of any fees and also be prepared to communicate with your customers if necessary to avoid confusion about payments and who owns the customer’s debt.

Invoice factoring can be an ideal option to get cash on a short-term basis. Unlike other forms of financing, working with a factor does not require you to take on debt or sign up for ongoing monthly payments. Instead, it lets you use your unpaid invoices as a form of collateral to get an immediate “cash advance” in exchange for a percentage of the total invoice amount. This financing option can be flexible and fast, however it also requires you to understand the full picture of any fees and also be prepared to communicate with your customers if necessary to avoid confusion about payments and who owns the customer’s debt.

Founded in 2006 and headquartered in NYC, Kapitus is one of the most reliable and respected names in small business financing. As both a direct lender and a marketplace built with a trusted network of lending partners, Kapitus is able to provide small businesses the financing they need, when and how it is needed. With one application business owners can save time and money, while eliminating the stress that comes with applying to different lenders. At Kapitus, we believe that business owners should be able to focus on running their business, while we take care of the financing. To learn more visit: kapitus.com