Each small business is unique, but every business has at least one thing in common: they all need money to operate. Whether itâs for day-to-day operations, a major purchase, or the dreaded unexpected emergency, businesses need readyÂ cash — and lots of it.
In an ideal world, you would just reach for your checkbook or debit card every time an expense popped up. Unfortunately, things aren’t that cut and dry in the real world. Customers are late in paying their invoices; businesses have seasonal slumps; unexpected emergency expenses cut into the bottom line.
Wouldnât it be great to have on-demand access to cash whenever it was needed? Actually, there is a small business financing solution that works that way: a business line of credit.
What happens, though, when you have poor credit? Maybe youâve tried to qualify for other business financing in the past and have been turned down. The great news is that business lines of credit are available to everyone, even applicants with low credit scores.
Ready to learn more? Read on for more information about business lines of credit, including what they are, how you can use them, and how to obtain one — even if you have less-than-perfect credit.
What Is A Business Line Of Credit?
A business line of credit is a type of revolving credit. The lender provides the business owner with a credit limit. Much like they would with a credit card, the borrower can make as many draws as needed — up to and including the total credit limit — to get fast access to funding. Interest and fees are charged only on the balance that has been used by the borrower.
Once a borrower begins to make draws, the money is paid back at a later time on a scheduled basis, which could be weekly, monthly, or on another schedule set by the lender. Payments are made toward the principal balance, as well as toward the interest and fees charged by the lender. As money is paid back, it becomes available to borrow again.
Is A Credit Card A Type Of Line Of Credit?
Business credit cards are another type of revolving credit, and while very similar to lines of credit, they arenât exactly the same thing.
A credit card allows a borrower to make multiple purchases up to and including the set credit limit. Cards can be used for online purchases or brick-and-mortar establishments that accept credit cards.
Cash draws can be made from a credit card, but these draws typically come with higher fees and interest rates. With most credit cards, you also can only access a certain percentage of your total credit limit as a cash advance. When cash is needed, a line of credit is the better option.
However, credit cards have their own benefits. Credit cards can be used immediately, while lines of credit draws may take 24 hours or longer. Credit cards also offer rewards programs, allowing users to rack up airline miles, bonus points, and cash back with every use. Lines of credit do not offer these rewards.
When Should I Use A Line Of Credit?
A line of credit is handy any time you need quick access to money. A line of credit can be used when an emergency expense arises; it can also be used for purchases that youâd rather pay off over time.
Really, a line of credit can be used for any business expense. However, like other types of financing, line of credit loans should only be used when needed. Interest and fees can make this a very expensive form of credit. Before spending, ask yourself if the return on investment will be worth the cost or if there are more affordable alternatives available. If you do decide to make a draw, try to pay the balance off as quickly as possible to avoid paying unnecessary interest or fees.
When Should I Look For Other Financing Options?
In some scenarios, you may want to look into other financing options. For very large purchases, a long-term loan with a lower interest rate may be a more logical choice.
One of the major benefits of a line of credit is how fast you can receive the money you need. For emergencies, this may be the only option. However, if you are planning to make a purchase that isnât an immediate need, it may be best to shop your options to find the most affordable type of financing.
What Is Considered Bad Credit?
Some lenders have their own standards to define bad credit, but in general, a score between 350 and 599 is considered poor.
A low credit score could occur for a number of reasons. A missed payment, a foreclosure, collections, or bankruptcy can pull a credit score down quickly. Even having too many new accounts or high credit utilization can drag a score down. Unfortunately, most lenders donât consider the circumstances and just see one thing with a low credit score: risk.
Why Is My Personal Credit Score Important?
Lenders consider borrower risk before approving a loan. The lower the risk, the more likely the lender will be to approve the loan. The higher the risk, the higher the chances are of a rejected application. If a risky borrower is approved, interest rates are usually much higher and terms are not as favorable.
Personal credit score plays a big role in assessing risk. Borrowers with high credit scores will have more financing options and will receive the best rates and terms. Borrowers with lower credit scores will be limited in their options. They may qualify for lower amounts and suffer from higher overall loan costs. In some cases, borrowers with low scores will be unable to qualify for unsecured loans. These borrowers will have to put up collateral or pay a deposit for a secured loan.
How Quickly Can I Improve My Personal Credit Score?
Unfortunately, boosting your personal credit score isnât an overnight process. While itâs possible to raise your score by a few points in just a few weeks, the process of raising your credit score from âbadâ to âgoodâ could take months â or in some cases, years.
The first step to improving your personal credit score is to pull your report and score to see where you stand. This can be done at no cost online. Look carefully through your report for any erroneous items that can be disputed with the credit bureaus. A mistake on your credit report will need to be proven to the creditor and then correctedÂ or deleted.
If you have open lines of credit, make sure to pay your balances down as quickly as possible. Not only will this help you save on interest over time, but it will also lower your credit utilization, which in turn can help raise your credit score.
At the very least, make sure that youâre making minimum payments on all of your accounts each month. A late or missed payment can severely affect your credit score. Do not make too many inquiries into new accounts, and donât open too many new accounts at the same time. All of these moves throw up a red flag to lenders.
Finally, raising your score can sometimes be a waiting game. Hard inquiries remain on your credit report for two years, while bankruptcies and foreclosures stay on your credit report for seven years. While you can work in other ways to build your credit in the meantime, only time will erase these past mistakes.
Is My Business Credit Score Important?
If youâre a business owner, you have a business credit score in addition to your personal score. A business credit score shows your businessâ credit history and helps lenders assess whether or not you are a risky borrower.
Lines of credit, credit cards, and loans taken out for your business will all affect your business credit score. As with your personal credit, if you make late payments or miss payments on a business account, your score will be lower. Your business will be viewed as a riskier investment. If your score is high, lenders will feel more confident in giving you the financing you seek.
A business credit score is important when applying for financing, so it’s vital to ensure that your business credit score is as high as possible. The best loan products, like long-term bank loans and commercial mortgages, are reserved for borrowers with high personal and business credit scores. For many lines of credit, business credit score is considered by the lender when determining whether to approve your application.
The Best Business Lines of Credit For Bad Credit
Whether you have an emergency expense and need money quickly or you just want to have a backup form of funding on-hand for the future, a line of credit can be good for your business. Before you apply, become familiar with the best lines of credit for borrowers with poor credit scores.
Fundbox provides business lines of credit up to $100,000 for qualified borrowers. In order to qualify, all applicants must have a business checking account and a recommended yearly revenue of $50,000. Businesses must be based in the U.S. or in select U.S. territories. Applicants must have at least two months of activity in Fundbox-supported accounting software such as QuickBooks. If this qualification is not met, an applicant can provide bank statements to prove three months of transactions in a business bank account. There are no minimum credit scores to qualify.
The application process for Fundbox takes less than 10 minutes and most applicants can receive an approval decision in 3 minutes or less. Once approved, the borrower can access funds immediately, with most transfers going through as quickly as the next business day. Fundbox charges fees starting at 4.66% on the amount drawn. Balances can be paid early and any remaining fees will be waived. Repayments are made weekly over 12 or 24 weeks.
Kabbage provides up to $250,000 via lines of credit. While Kabbage does pull your credit score, the lender focuses more on business performance than credit history, so borrowers with low credit scores can be approved.
To qualify for a Kabbage line of credit, businesses must have been in operations for a minimum of one year. There are revenue requirements: either $50,000 in annual revenue or $4,200 monthly revenue for the last three months. Kabbage requires borrowers to link their business accounts (PayPal, QuickBooks, business bank accounts, etc.) to determine if they qualify and how much they are qualified to receive.
With Kabbage, the application and approval process takes approximately 10 minutes. Once approved, borrowers can draw money immediately, and funds are usually transferred the next business day. Kabbage has also released the Kabbage Card, which lets borrowers use funds immediately anywhere VISA is accepted.
Kabbage offers repayment terms of 6 or 12 months. Payments are made monthly through automatic withdrawals. Kabbage charges fees between 1.5% and 10% on the borrowed amount based on business performance.
Headway Capital provides lines of credit up to $100,000. Minimum qualifications for a Headway Capital line of credit is annual revenue of at least $50,000 and at least one year in business. The business must also be located in one of the states served by the lender. There are no minimum credit score requirements, although a soft credit pull will be performed during the application process.
Headway Capital offers repayment terms of 12, 18, or 24 months. Weekly or monthly payment options are available. Fees, minimum initial draw amounts, and maximum credit limits vary by state. Applicants for Headway Capital lines of credit can be pre-approved in just minutes. Once underwriting is complete and the loan is approved, borrowers can draw immediately from their line of credit and receive the funds as quickly as the next business day.
OnDeck provides lines of credit up to $100,000 for qualified business owners. All applicants must be in business for at least one year with annual revenue of at least $100,000. The applicant must also be a majority owner of the business and have a credit score of at least 600. Business and personal credit scores,Â as well as business performance, will be evaluated for approval.
Rates for OnDeck lines of credit are as low as 13.99%, although the average APR is 32.6%. Repayment terms are weekly and made over a 6-month period. Once approved, borrowers can make a draw on funds immediately. With an ACH transfer, money will be received within 1 to 2 business days. OnDeck also offers Instant Funding, which transfers funds to an eligible business debit card in just minutes.
Two Credit Cards For Merchants With Bad Credit
If you want to pay your vendors, contractors, and suppliers, a business credit card may be the right choice for you. A credit card gives you instant access to funding without waiting for transfers, and you can withdraw cash if needed. Not only will you be able to use your funds immediately, but business credit cards can also help you boost your credit score to apply for other types of financing in the future.
Capital One Spark Classic
Capital One Spark Classic For Business
The Capital One Spark Classic is a popular choice with business owners that have lower credit scores. To qualify, all applicants must have a credit score of at least 580. This is an unsecured card that comes with a 24.74% variable APR and no annual fee.
One of the advantages of this card is that it has a 1% cash back offer for every business purchase. Rewards are unlimited, and there is no minimum to redeem. The Capital One Spark Classic comes with fraud coverage and free employee cards. Using the card responsibly can also help you boost your creditÂ while giving you access to the capital that you need.
Capital One Secured Mastercard
Secured MastercardÂ from Capital One
The Capital One Secured Mastercard is a personal credit card, but it can be used by a business owner who wants to rebuild their credit.
There is no annual fee, and this card comes with a 24.99% variable APR. The Capital One Secured Mastercard is a secured credit card that requires a refundable deposit of $49, $99, or $200 based on the creditworthiness of the applicant. Once approved, a credit line of $200 will be available. Once five monthly payments have been made on time, borrowers will receive a credit limit increase. Over time, borrowers can receive higher credit lines and qualify for additional Credit One products.
Having a low credit score can make qualifying for a business loan difficult but not impossible. Lines of credit and credit cards can help even borrowers with low scores receive the money they need to build their businesses. By applying for the right line of credit and using it responsibly, you will not only keep your business operating smoothly but can also build your credit in the meantime to qualify for more financing options in the future.
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