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How to Get a Small Business Line of Credit

Loan applicationIf you’ve had trouble getting a small business loan or other types of bank credit or financing for your business or startup, here’s something that might work:  Apply for an unsecured small business line of credit.

Start small – basically with whatever size line a lender is willing to provide.  The important thing is to get a foot into the bank financing door. Even if the credit line is small, put it to immediate use and pay it off diligently and always on time.

Once you’ve established a track record, you can seek to expand the credit line in small steps.  Many major banks that serve small business offer unsecured business credit lines of $5,000 to $100,000 for firms that have been around at least 2 years.

These include well known commercial banks such as Bank of America, Wells Fargo, US Bank, Chase and Key Bank, as well as community banks, credit unions, online banks and some you might not have thought of such as American Express Bank, Capital One Bank, Discover Bank and Advanta Bank.

A Flexible Financial Tool

A business credit line is a flexible financial tool that can help you grow if you use it right. And even if you don’t have an immediate need for credit, it’s handy to have in your hip pocket if business conditions change.  Establishing the revolving credit line is cheap, you only pay interest on what you borrow and you can use the line for almost anything.

Six things a credit line can be used for:

  1. Remodel, expand or upgrade your store, offices or other facilities.
  2. Buy new computers, servers, office technology or other equipment.
  3. Purchase extra inventory for upcoming promotions or seasonal spikes.
  4. Launch a new online marketing campaign.
  5. Create a new product prototype, pursue a promising business opportunity.
  6. Cover unexpected expenses.

Banks are still a good place to look for credit lines.  Sure, bankers are being more tight-fisted these days, but they do have money to lend – especially for established businesses – and credit lines are one way they are doing it. Wells Fargo, for example, offers small business credit lines up to $100,000 that you can apply for online, even if you’re not a current customer.

Credit lines are also appealing because of their low costs.  Interest rates will vary with prevailing market rates, but many lenders allow you to tap the line – via paper check, online, check card or other method – for no fee.  However, you can expect to pay a modest fee to open the account once you’ve been approved. Wells Fargo, for example, charges $150 for lines under $25,000 and $250 for larger lines.  Any annual fee is often waived for the first year, and may run $100-$150 annually thereafter.

Ask about interest rate protection

You should also ask if the lender offers some kind of interest rate protection or lock-in feature to protect you against rising rates in the future.  Some lenders will let you lock in an interest rate on your business line of credit for a year.

Beware of using a credit line for cash advances however, as many banks charge a cash advance fee that can run 3% or more (on top of any interest you’d pay).

How to apply for a Business line of Credit

To obtain a credit line, you will probably need to supply some financial information about your business as well as yourself, so be prepared with income and other statements or tax returns.

Sources of small business credit lines are numerous. To find the perfect fit and absolute best terms, you should plan to comparison shop among several lenders.

Some banks also offer unsecured revolving lines of credit backed by the U.S. Small Business Administration (SBA).  The SBA’s CAPLines program helps business owners meet short-term and working capital needs and can be a great option for newer businesses less than four years old.

Different types of CAPLines

  1. Seasonal Line.  Loan proceeds can only be used to finance seasonal increases of accounts receivable and inventory (or in some cases associated increased labor costs), but can be revolving or non-revolving.
  2. Contract Line. This line finances the direct labor and material cost associated with performing an assignable contract and can be revolving or non-revolving.
  3. Builders Line.  If you are a small general contractor or builder constructing or renovating commercial or residential buildings, this can finance direct labor and material costs. The building project serves as the collateral and loans can be revolving or non-revolving.
  4. Standard Asset-Based Line. This is an asset-based revolving line of credit for businesses unable to meet credit standards associated with long-term credit. It provides financing for cyclical growth, recurring and/or short-term needs. Repayment comes from converting short-term assets into cash, which is used to pay back the lender. Your business can continually draw from this line of credit, based on existing assets. This line is generally used by businesses that provide credit to other businesses.
  5. Small Asset-Based Line. This is an asset-based revolving line of credit of up to $200,000. It operates like a standard asset-based line except that some of the stricter servicing requirements are waived, as long as your business can show repayment ability from cash flow for the full amount.

4 Credit Line Tips and Warnings

  • Avoid carrying a constant balance on your credit line. Periodically paying down the debt completely will keep the credit in place and your lender happy.
  • One key factor in obtaining a credit line will be your business cash flow.
  • If your business doesn’t quality for a standard credit line, ask for an “asset-based” line.
  • Remember, the best time to set up a business line of credit is before your business actually needs it.

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How to Get a Small Business Loan without a Bank

Unless you carry gold-encrusted financial credentials, many banks and credit card companies no longer want you as a credit customer. But that’s okay, since many credit-worthy (as well as credit-challenged) customers are turning to online “peer-to-peer” (P2P, or person-to-person) loan sources, and are proving they no longer need a bank.

Web-based P2P lending is booming.  Consider it the democratization of the lending industry — average Americans making loans to each other in a controlled marketplace made possible by the evolution of several websites created to facilitate P2P lending.

One such site, Prosper.com, has a membership base of over a million individuals, including both those who lend and those who borrow, and has funded over $230 million in loans.  The system works like an auction where credit-worthy borrowers post a loan request or “listing,” and would-be lenders bid for the business. So if you have a good-looking credit history, want to borrow $10,000 and are willing to pay, say, 10 percent interest, you could end up with a loan at a lower rate as lenders compete for your business.

As a borrower, you set the amount of want and the rate you want to pay and wait for lenders to step up.  And it works. Much like eBay spawned an army of small e-Bay businesses, P2P sites are attracting small investors who see it as a way to earn a higher return on their money. 

P2P sites have created a turnkey structure to facilitate the loan process. In addition to matching peer borrowers with peer lenders, the process provides all of the loan documents and payment systems to make the loan happen.

In addition to criteria commonly used by banks, such as credit scores and histories, Prosper lenders, for example, can consider borrowers’ personal stories, endorsements from friends and group affiliations. Once the auction ends, Prosper takes the bids with the lowest rates and combines them to facilitate the funding of one simple loan to the borrower, and then issues what are called “Notes” to all the winning bidders. Prosper handles all on-going loan administration tasks including loan repayment and collections on behalf of the matched borrowers and investors. Prosper members can also trade Notes with other members on the Folio Investing Note Trader platform. 

Another leading P2P site is LendingClub.com, which works similarly to Prosper.com. RaiseCapital.com specifically targets small business loans and connecting entrepreneurs to potential investors.    

Beware of “me-to” sites that attempt to jump on the P2P bandwagon but might not have the member base or resources to stay in business. A site called Pertuity Direct, for example, came and went quickly as its investors pulled the plug. Because P2P lending sites have to meet state government lending rules (as well as federal SEC requirements), they aren’t operating in all 50 states. Check their web sites for a list of areas they operate.

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