Business Lines of Credit: What You Need to Know Before Applying
For many small business owners, a line of credit (LOC) is one of the most useful financing tools available. Unlike a term loan, which gives you a lump sum to repay over time, a line of credit works more like a safety net—you can borrow when you need it, repay, and borrow again.
But before you apply, it’s important to understand what banks look for, what collateral they’ll accept, what terms they’ll offer, and whether this option is the right fit for your business.
What Collateral Will Banks Accept for a Line of Credit?
Most banks require collateral to secure a line of credit, especially for small businesses without a long track record. Common forms of collateral include:
Accounts Receivable – Unpaid invoices from customers.
Inventory – Product or materials your business holds.
Real Estate – Commercial or personal property.
Equipment – Machinery, vehicles, or technology assets.
Personal Guarantees – In some cases, the bank will require the owner’s personal credit and assets to back the LOC.
The type and value of collateral depend on your business size, industry, and credit history.
What Terms Will Banks Give?
The structure of a business line of credit can vary, but here’s what most banks will consider:
Credit Limit: Often tied to collateral value, annual revenue, and cash flow.
Interest Rate: Variable, tied to the Wall Street Journal Prime rate plus a margin.
Repayment Terms: Typically interest-only monthly payments with principal due as borrowed funds are repaid.
Review Periods: Many banks review lines annually, requiring updated financials.
Covenants: May include maintaining a minimum Debt Service Coverage Ratio (DSCR) or restrictions on additional borrowing.
Pros of a Business Line of Credit
Flexibility: Borrow only what you need, when you need it.
Cash Flow Support: Smooths out gaps between payables and receivables.
Emergency Fund: Acts as a financial cushion for unexpected expenses.
Builds Credit: Responsible use strengthens your business credit profile.
Cons of a Business Line of Credit
Variable Interest Rates: Payments can rise with market rate changes.
Collateral Requirements: You may need to pledge valuable assets or personal guarantees.
Annual Renewals: Ongoing paperwork and reviews can be time-consuming.
Discipline Required: Easy access to funds can tempt businesses into over-borrowing.
Final Thought
A line of credit can be one of the most valuable financial tools for your business—but only if managed wisely. By understanding what banks expect, preparing the right collateral, and weighing the pros and cons, you can decide if this option fits your business’s financial strategy.
At 2717 Consulting, we help small business owners prepare line of credit requests that get approved and ensure you’re negotiating terms that make sense for your situation.
📩Let’s talk: 2717.consulting1@gmail.com