These are the steps for obtaining a line of credit:
- Identify potential collateral. Before you even look for a lender, the first step in attaining a line of credit is considering what assets you can pledge as collateral on a loan. If you can find collateral to secure a loan, you’ll be able to secure much more favorable terms.
- Choose a type of line. Once you determine what collateral you have to pledge, you can decide whether you want to get a HELOC, a personal line or a credit card. Or, if you have been in operation for at least two years, you’ll probably want a business line of credit.
- Pick a lender. Different lenders specialize in different types of loans. If you want an unsecured business line of credit, there are online lenders that can offer this. They may charge higher interest than you might pay on a secured line of credit, but you should be able to get your money fast after a short application process.
- Apply. Applications vary by lender and loan type. Some can be completed online, while others involve reviewing documents with a loan officer, or meeting with a private banker or credit union.
- Accept terms and close. If you qualify for a line of credit, your lender will provide you with a term sheet that you’ll need to review before accepting terms and closing on your loan, which may involve signing a lien agreement pledging certain property as collateral.
Once you close on a line of credit, you should have access to funds within a few days. For some online lenders, it may take a few days to wire funds to your bank account, but some offer funds as quickly as the same day the loan documents are executed.
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Pros and cons of revolving credit for business
Pros
- You don’t pay interest until you draw funds against the line.
- You only pay interest on the money you borrow.
- The money is available repeatedly once you pay down the balance.
- Lines of credit may charge lower interest rates than other loan types.
Cons
- Some lines, including unsecured lines, charge higher interest rates than secured lines and other types of loans.
- The draw period when you borrow against the line typically lasts 12 or 24 months; then the loan must either be renewed – for a fee – or paid in full.
- Lines may not be convertible to a structured loan for repayment. You may have to pay back the full balance all at once if the lender won’t renew, and you can’t find another lender to refinance the balance.
In spite of these drawbacks, revolving lines of credit have many advantages that make them ideal for small business owners. Using revolving lines of credit, you can finance outsized expenses that will grow your company.