Thursday, September 15, 2016

Best Business Line of Credit for 2016

Getting a business line of credit is often a good idea to help manage your cash flow, deal with business expenses, and even invest in long-term growth plans. Unlike a business loan, however — in which you lock in to borrowing and paying interest on a set amount — a business line of credit allows you to borrow up to a certain limit, but only pay interest on the amount you actually borrow. So, how do you know which business line of credit lender is best for you?

The answer is going to be determined by your individual financial goals (what you need the money for and how much); your credit score; your annual revenue; the number of years you’ve been in business; and a few other factors too. The good news is that there are great business line of credit options out there for just about anyone.

The Simple Dollar’s Top Picks for Best Business Line of Credit

  • Best for New Businesses with Decent Credit and Strong Revenues: OnDeck
  • Best for New Businesses with Decent Credit and Small Borrowing Needs: StreetShares
  • Best for New Businesses with Lower Credit Scores: Kabbage
  • Best for Established Businesses with Strong Credit Scores: Lending Club
  • Honorable Mention: Lendio

How I Found the Best Business Line of Credit Lenders

You may notice that all of my choices for Best Business Line of Credit are platform lenders — also known as “alternative lenders” or “online lenders.” Banks are a major source of business lines of credit too, of course, and if you can get a good deal from your bank, that’s often the best place to start looking for a line of credit. But many business owners cannot get approved by a bank, need cash fast and don’t have time to wait for a bank loan approval to go through, or can’t get the right amount of money from a bank. That’s why my top picks are all platform lenders; they offer just about any small company a chance to receive a business line of credit, and on good terms.

To determine which online lenders offered the best business line of credit, I first looked at the following criteria:

  • Lender reputation
  • Funding amount limits
  • Minimum credit requirements
  • Time in business/revenue requirements
  • Funding speed/convenience
  • APR and fees
  • Repayment terms

After comparing each online lender’s attributes in these key areas, I then used the information to determine the best business line of credit lender for the most common user groups.

The Best Business Lines of Credit Lenders

Best for New Businesses with Decent Credit and Strong Revenues

Learn More on OnDeck.com's secure website

OnDeck Highlights


  • Credit Limit:
    $100,000
  • APR Range:
    14-40%
  • Minimum Credit Score:
    500

OnDeck approves line of credit limits of up to $100,000 for borrowers with a credit score of 500 or more (most OnDeck customers have a credit score of 675 or higher), at least nine months in business, no bankruptcies in the past two years, and annual business revenues of at least $75,000. OnDeck provides relatively fast cash, disbursing funds within a few days, or sometimes as quickly as within 24 hours. OnDeck’s line of credit APRs range from 14-40%, with an average APR of 29.99%. There is a $20 monthly account maintenance fee, but you can have this fee waived for six months if you borrow $5,000 or more within the first five days of opening your line of credit account.

OnDeck requires lines of credit to be repaid weekly with automatic deductions from your business bank account — but you have flexibility for how much money you pay back per week, and you can pay off the full balance at any time with no extra fees.

If your business needs quick cash and you can handle the weekly repayments (for example: if you’re running a retail business or a restaurant with steady sales, and you need a quick infusion of capital to buy inventory or cover temporary expenses), OnDeck will likely be your best choice.

If your business tends to have slow receivables and uneven cash flow, however, (like if you’re a freelance graphic designer whose invoices get paid on 30- to 60-day terms), then OnDeck’s weekly repayments might not be the best fit for your overall cash flow. In that case, I’d recommend trying Kabbage or Lending Club instead.

Who it’s good for: New business owners with decent credit and strong revenues, or more established business owners (OnDeck’s typical customer has been in business for nine years).

Who should pass: More established businesses that can qualify for lower APRs; businesses that need bigger credit limits than $100,000; business owners with credit scores lower than 600 (although OnDeck says it will consider a minimum credit score of 500); businesses on the OnDeck restricted industry list.

Best for New Businesses with Decent Credit and Small Borrowing Needs

Learn More on StreetShares.com's secure website

StreetShares Highlights


  • Credit Limit:
    20% of your annual revenue, up to $100,000
  • APR Range:
    9-40%
  • Minimum Credit Score:
    600

StreetShares was founded by US military veterans with the goal of encouraging and supporting entrepreneurship by other veterans and military spouses, but all business owners, veterans and non-veterans, are welcome to apply. It offers business lines of credit starting from $5,000 up to $100,000 to companies that have been in business for at least one year, with annual revenues of at least $25,000, plus a credit score of 600 or more. StreetShares will also lend to even younger companies (as few as six months in business) if you have $100,000 in annual revenue. APRs range from 9-40% and funds are disbursed within one to five days.

Your maximum credit limit with StreetShares is determined by calculating 20 percent of your total annual revenue — so if you have $150,000 in annual revenue, your maximum limit on a line of credit would be $30,000. Borrowers cannot have had any bankruptcies within the past three years, and cannot have any current tax liens or collections (unless you can provide documentation to explain the situation).

Like OnDeck, StreetShares requires automatic weekly repayments, so if your business has uneven cash flow (e.g., if you’re regularly waiting on your invoices to get paid), it probably won’t be your best option. Try Kabbage or Lending Club instead.

Who it’s good for: Business owners who are US military veterans, as well as new business owners with decent credit and high revenues, or who only need to borrow relatively small amounts of money.

Who should pass: Fast-growing businesses that need to borrow larger amounts, or that do not have good credit. StreetShares is currently not available for business owners in North Dakota and South Dakota.

Best for New Businesses With Lower Credit Scores

Kabbage is one of the fastest and most flexible platform lenders, disbursing cash within minutes to qualified borrowers. It offers line of credit amounts from $2,000 to $100,000, and, unlike our other top picks, does not require any minimum personal credit score. Because of this, it will likely be your best option if you have bad credit, your business is still in startup mode, or if you sell products online.

Kabbage uses alternative indicators to evaluate your creditworthiness, such as eCommerce sales and shipping data — things traditional banks don’t take into consideration, but nevertheless affect your ability to repay borrowed money. Kabbage requires borrowers to have been in business for at least one year and to have $50,000 or more in annual revenue, however. Borrowed money can be repaid within six to 12 months, with APRs ranging from 32-108%.

Who it’s good for: New businesses or business owners with bad credit, and businesses that need small amounts of money (lines of credit starting at $2,000) — although, Kabbage does also provide lines of credit up to $100,000.

Who should pass: More established businesses with better credit scores that can qualify for lower APRs elsewhere, and businesses that need credit limits over $100,000.

DISCLOSURE — I work as a freelance blog writer for Kabbage, but it did not pay me to write this article and it was not involved in its creation. I have personally interviewed many small-business owners who are customers of Kabbage and I know that Kabbage’s product can be a great help for business owners who need fast, convenient access to working capital.

Best for Established Businesses With Strong Credit Scores

Learn More on LendingClub.com's secure website

Lending Club Highlights


  • Credit Limit:
    $300,000
  • APR Range:
    6.25-21.85% (variable)
  • Minimum Credit Score:
    600

Lending Club is a peer-to-peer lending marketplace where business owners can get a line of credit by borrowing from individual investors. From the borrower’s perspective, Lending Club essentially works the same as the other platform lenders, but instead of borrowing money from a finance company, you’re using a non-bank “peer-to-peer” alternative model for borrowing. In this model, a collection of individual people directly decide to invest in your company by funding your line of credit, and then you repay their investment with your loan repayments. It’s kind of like “crowdfunding,” but instead of asking people to just give you money, you’re asking them to lend you money, and you agree to repay them with interest so they can see a return on their investment, just as if you were borrowing from a bank.

Lending Club offers business lines of credit ranging from $5,000 to $300,000, and requires a minimum of two years of business history, at least $75,000 in annual revenue, and a personal credit score of 600 or more with no recent bankruptcies or tax liens. You must repay any money borrowed within 25 months, and you need to offer collateral for lines of credit over $100,000.

Lending Club’s lines of credit have variable rates from 6.25- 21.85%, with an average rate of 15.08% for lines of credit in the last 12 months, ending May 15, 2016. (Averages are based on a one-year offer.)

Who it’s good for: Established businesses with decent credit scores.

Who should pass: Younger businesses with lower credit scores or annual revenues under $75,000. Lending Club loans are currently not available to residents of Iowa.

Best Business Line of Credit At A Glance

Lender Borrowing Limits Credit Requirements Annual Percentage Rate (APR) Repayment Terms
OnDeck Up to $100,000 Minimum credit score of 500

At least 9 months in business and $75,000 in annual revenue
14-40% Weekly repayments required

No prepayment fees

$20 monthly account maintenance fee
StreetShares $5,000 to $100,000;
maximum line of credit is limited to 20% of your annual revenue
Minimum credit score of 600

At least 1 year In business and $25,000 in annual revenue
9-40% Weekly repayments required

No prepayment fees
Kabbage $2,000 to $100,000 No minimum credit score

At least 1 year in business and $50,000 in annual revenue
32-108% 6-12 months
Lending Club $5,000 to $300,000 Minimum credit score of 600

At least 2 years in business and $75,000 in annual revenue
Variable rates from 6.25-21.85% 25 months

Collateral required for lines of credit over $100,000

Best Business Line of Credit Honorable Mention

Learn More on Lendio.com's secure website

Lendio is not actually a financing company — it does not provide loans. Instead, Lendio is an online marketplace for lending that connects small-business owners with alternative lenders (“platform lenders” — including some of the ones featured in this article) and lets you compare rates, fees, and details to find the right loan or line of credit for you, based on your qualifications and parameters.

Lendio has an easy-to-use interface that quickly brings up lots of options for loans and lines of credit, depending on the amounts of money that you want to borrow and other details that you select. Its platform uses machine learning to quickly match business owners with lenders, and then you can apply to multiple lenders at once with a single application. Lenders then compete for your business, and you can choose the loan with the best rate and terms. It’s a good way to quickly get an overview of the various line of credit options that are available to you, while saving time and ensuring that you get the best possible deal on a line of credit.

Why Get a Business Line of Credit?

A business line of credit combines some of the advantages of both a term loan and a business credit card — it tends to offer a higher credit limit than a credit card (for example, depending on the lender, you can borrow up to $100,000, $200,000, $500,000 or more), but generally offers lower interest rates than a credit card. A business line of credit, like a credit card, is a revolving credit account — so you can borrow as much or as little as you want (within your predetermined credit limit), and then you usually have the option to pay off the debt as quickly as you like (as long as you meet your minimum payments and uphold other requirements of your agreement with the lender).

In general, business lines of credit tend to have lower interest rates and higher credit limits than a credit card, but more flexibility than a business loan. Lines of credit also tend to be unsecured — meaning you don’t have to put up collateral and risk losing your house or car or other property if the loan cannot be repaid.

Other Ways to Obtain Working Capital

Business Loans

traditional business loan, also known as a “business term loan,” is a loan for a specific amount of money, paid off over a specific “term” of time, usually with fixed monthly payments and a fixed interest rate. Term loans are typically used for one-time purchases, such as buying business equipment, real estate (land and buildings, etc.), or making other capital investments in the business. Business term loans are often secured loans — meaning the lender gets added “security” for the money it loans to you in the form of collateral, such as real estate or other business property. Secured term loans typically offer the lowest interest rates, however — generally lower than either business lines of credit or business credit cards. One disadvantage of a term loan is that they have to be repaid each month in the same amount — so if you ever have a cash flow crunch, you could be in trouble if you fail to make your monthly loan payment in full.

While a business term loan is often best for one-time investments or major purchases, a business line of credit is typically the best financial solution for ongoing purchases or expenses of varying amounts — such as buying inventory, making payroll while waiting for client payments to arrive, dealing with seasonal cash flow shortfalls, or other short-term outflows. A business line of credit gives you flexibility to deal with various financial challenges or investment opportunities (new product development, new inventory purchases, etc.) throughout the year.

Business Credit Cards

Business credit cards work just like personal credit cards, but they are in the name of (and build credit history for) your business. Business credit cards are typically unsecured debt — meaning there is no collateral backing up your loan — so the bank is able to charge you higher interest rates for it. Many small business credit cards have a limit of $10,000 or less; although, this can be negotiated with your bank. They are a revolving credit account, which means they give you the flexibility to pay off as much or as little of your debt each month as you choose, and you can borrow as much or as little as you want, up to the credit limit. One reason why business owners often seek a line of credit is that their business credit cards do not have a high enough borrowing limit, and they need to borrow more money than what a business credit card can offer in order to expand.

If you are a solopreneur and your borrowing needs are simple and can be met with a smaller credit limit, you might be perfectly fine just using a business credit card instead of opening a line of credit. As Meredith Wood, director of education at Fundera, explains: “Ask yourself if a line of credit is the right product for you. While it is always nice to have a line of credit on hand, you could have a business credit card that serves that purpose. Depending on what you need the money for, a term loan might be easier to qualify for and more affordable. If it’s a one-time investment you’re wanting to make, look at term loans first.”

How About Getting a Business Line of Credit Through My Bank?

If you’re running your own business, you’re already working with a bank or credit union. So why not just get a business line of credit from your bank? You certainly can, but know that there can be a few pitfalls involved, especially for small or newer businesses.

Oftentimes, banks won’t offer a line of credit or small business loan to a young company, or a new startup that doesn’t have a well-established business credit history. As Wood says, “A bank line of credit is one of the hardest products to get, and we’ve seen a lot of banks pulling lines of credit from their customers.” She advises to “start first with where you bank, but if you can’t qualify for a bank line of credit, which is very hard for the average small-business owner to do, you can look online, shopping with a marketplace.”

Brian Smith, SVP of small business banking at Capital One, explains: “There may be an upside to working with a bank you have a relationship with already. At Capital One, we reward loyalty and long-term customer relationships with special offers, so it’s worth looking into that as well. Of course it’s always prudent to come prepared to a meeting with a banker. Be sure to understand and communicate the need for the line of credit, cash flow impacts to your business, and how you intend to use it. This level of communication will convey a deeper trust in your banking relationship and help a banker provide tailored recommendations for a business. For example, being able to describe the timing of your cash flow, the vendor discounts available, the sales cycle, and how you will use the line of credit to leverage those, thereby increasing profitability, will set you apart from the crowd.”

Stephanie Travis, owner of Cash Flow Signals, an accounting and cash flow management consulting company, says that even if you can’t get a line of credit right away, it pays to be creative when you’re trying to get a business line of credit from a bank. She says, “I’ve seen a situation where the borrower had a Certificate of Deposit (CD) at the bank. The lender wanted the borrower to open up an installment loan secured by the CD. With that, the lender then agreed to a line of credit. So, ask the bank what types of combinations of loans and cash security would get a good deal. Also, consider dealing with a local bank that has a loan officer with local authority. For example, I was able to get an unsecured $15,000 loan with just the local bank guy’s approval. I knew him from business networking around town. It was pretty unusual that it was unsecured. But he had power to lend money at low amounts locally.”

Also, keep in mind that even if you get approved for a business line of credit from a bank, that doesn’t mean your borrowing needs are covered forever. Sometime in the future, the bank might decide to re-evaluate your credit line and reduce your available credit, at its own discretion, for reasons beyond your control. According to a National Small Business Association Survey cited by SBA.gov, as of 2014, “29 percent of small-business owners report having their lines of credit reduced in the last four years, and nearly one in 10 had their line of credit called in early by the bank.” So even if you get a small business line of credit approved from your bank today, that doesn’t mean it’s going to be a permanent solution — you might find yourself needing to look for other options in case your bank cancels or reduces your credit line.

The Bottom Line

If you need working capital for your business, first talk to your bank — it might be able to cut you a deal on a business line of credit that you couldn’t find elsewhere. But if you need cash more quickly than a bank can approve your application, or if your business has poor credit or nonexistent credit history, try one of the platform lenders I recommended. Depending on your credit score, business history, and business goals, one of these lenders will be able to provide you with the business line of credit that’s right for you.

 

The post Best Business Line of Credit for 2016 appeared first on The Simple Dollar.

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