Virtually every small business begins its financial life leveraging the founder’s personal credit history and borrowing capacity. Personal credit cards, savings accounts, loans from family or friends… these are common ways to fund a startup.
Building a credit history in the name of the business is the next step, often by opening business checking accounts and credit cards. But what happens when a business outgrows the limitations of a credit card, but doesn’t quite have the financial stability or profitability that a bank requires? A business line of credit is a tidy solution, especially when it comes to financing short-term purchases that can be paid off quickly.
Even if the credit line is a small amount, it’s a great way to get a foot in the door and build a banking relationship that can lead to bigger things.
There are different types and it helps to understand the differences.
Traditional Lines of Credit
Similar to credit cards in many ways, a business line of credit offers a set amount of funds for the business owner to use at his/her discretion. It can be a revolving line of credit that resets each time the balance is paid off, or a loan that closes once the initial transaction is complete.
They are also available in both unsecured or secured formats.
Unsecured Line of Credit
Unsecured business lines of credit require no collateral and are available as a traditional bank loan or backed with a Small Business Administration (SBA) guarantee. The loan decision is based on detailed financial reporting from the borrower that demonstrates the business is creditworthy and stable.
Depending on how long the business has been operational, some banks may require a personal guarantee on the loan until a solid payment history has been established.
The paperwork is reasonably fast, following conventional application processes, and funding can be available within a few weeks.
According to the SBA, unsecured lines of credit can be an ideal choice for startups due to their simplicity.
Secured Line of Credit
Secured lines of credit require a business asset to guarantee the loan in case of default, such as accounts receivables, inventory or real estate equity.
The interest rate is typically lower than an unsecured loan because bank risk is reduced by the guarantee, and it may have more flexible payment terms and a higher credit limit.
Because of the collateral involved, detailed paperwork and a longer approval process is necessary.
Whether secured or unsecured, most lines of credit can be used in any manner the borrower would like, as often as the credit limit allows.
Online (Streamlined) Lines of Credit
For those who prefer to avoid the traditional application process in favor of faster funding, online loans can be a nice alternative. It requires minimal paperwork, even for credit lines as high as $50,000.
The convenience has a cost, however. Because the application process is submitted electronically with no human interaction, the borrower doesn’t form a personal relationship with a banker.
It’s a sleek, low-touch process designed to keep bank costs low through automated processes, so approval decisions are based on specific criteria without the flexible, creative solutions and extra effort a banking relationship can provide. While this is ideal for some, many borrowers can benefit from speaking to a banker before they decide on the type of loan to apply for.
Not all banks provide interest rates that are lower than most credit cards the way Horizon Community Bank does, but all borrowers should expect it to be higher than a traditional line of credit loan due to the inherent risk the banker is taking by streamlining the process to skip standard protocols. Shopping around for the best possible interest rate is important.
On the plus side – and it’s a huge plus – funding can be approved instantly and available the same day.
Horizon Community Bank offers conventional and SBA unsecured business lines of credit – along with our new online quick loan product and other loan options. We’re here to help you succeed. Speak to a credit officer today if you’d like them to match your specific financial circumstances and long-term vision with the ideal loan package and interest rate.