post by:
Donna Cohen
In this post, we explore the benefits of using a business line of credit to finance your eCommerce business. We’ll cover what a business line of credit is, how to apply for one, and how many you can have. Learn how a line of credit can help you manage cash flow, seize opportunities, and scale your business. Discover if a line of credit is the right funding option for your eCommerce growth strategy. Don’t miss out on the potential of your eCommerce business—read on to see how a business line of credit can help you achieve your goals.
What is a Business Line of Credit?
Business lines of credit usually come from traditional banks: Wells Fargo, BofA, Schwab, Capital One. But you can also obtain a line of credit directly from any source that allows you to borrow capital on credit.
A line of credit (LOC) allows you to receive a loan, or a lump sum of funding, up front and pay back only what you use. Ultimately, you could borrow some of the available amount at one time and only pay back what you have taken (plus interest).
Lines of credit follow the same traditional loan rules as traditional loans from a bank. You borrow a certain amount and whatever you borrow you are expected to make fixed monthly minimum payments over a predetermined period of time. The difference between lines of credit and traditional loans is that as you pay back your balance, the repaid amount (plus the amount you have not borrowed from yet) is available to draw from again.
Lines of credit are also known as revolving loans or revolving lines of credit. They follow the same borrow and repay format as credit cards.
How to Apply for a Business Line of Credit
Typically new and small businesses can find it difficult to obtain adequate funding. Traditional bank lines of credit have strict qualification requirements and take into account your time in business, your type of business, business credit score, and annual revenue.
In order to apply, most banks will require a personal credit score along with a business credit score depending on your circumstance. In the instance you have not established business credit, personal credit will suffice.
You need to ensure you have the proper documents to submit to the lender. This includes:
- Proof of incorporation
- Tax returns
- Proof of assets
- Profit/loss statements
- Bank account statements
Once you have acquired the necessary documents, it’s time to fill out the application. The application itself should take no longer than a few minutes. However, once you submit the application to the lender it could take up to 7-10 business days to hear a response. eCommerce lenders (such as suppliers who allow you to open a line of credit to procure inventory) tend to have a faster response time within 24-48 hours.
Can You Have Multiple Business Lines of Credit?
It is not uncommon to have multiple loans, credit cards, or business lines of credit. Theoretically and depending on your financial needs, you could have a different line of credit for each vendor or bank. It’s important to take into account that multiple lines of debt can affect your credit score in the event that too many loans become difficult to manage, affecting your ability to pay on time and in full.
When building your business credit you should consider gradually adding on new lines of credit as your business grows. Doing too much too fast is just as bad for your credit as obtaining too little credit over a long period of time. Depending on the size of your business, projected growth revenue, and ability to make repayment on your debt while still clearing a profit you can have as many funding options available to you as possible.
Credit Cards Versus Business Line of Credit
If business lines of credit follow the same format as credit cards, why should you choose one over the other? When it comes down to it, you could benefit either way. Both credit cards and business lines of credit offer revolving access to funds. The main differences are that lines of credit tend to offer lower interest rates while credit cards have a higher application approval.
Credit cards have the added benefit of convenience – you can whip the card out at any point of sale register. Money from lines of credit can be transferred into a personal or business bank account to have quick access with a debit card.
Alternatives to Business Line of Credit
Business lines of credit are not only limited to a very strict amount of qualifying applicants, but they can be difficult to obtain. For example, without a minimum credit score of 500, you likely won’t make it past the application process. Even with a score below 600 chances are slim. Additionally, business lines of credit are not focused on eCommerce businesses, but general business financing as a whole. We have a few alternatives that are eCommerce friendly and flexible.
Merchant Cash Advance
Everyone will say a merchant cash advance is not a loan – and partially that is true. Since MCAs are not federally regulated, they are considered a commercial transaction between lender and borrower. MCAs offer you a lump sum of capital in exchange for your future credit/debit card sales. You are required to use an approved credit card processor with an MCA. Through the processor, the MCA lender will deduct a daily percentage from your daily credit/debit card sales.
This works similar to revenue share agreements in the sense that you never pay more than you earn that day. MCAs have the added benefit of knowing your final dollar amount before you sign the agreement. MCAs use factor rates instead of interest to determine a fixed end-dollar amount so your total repayment never changes.
Revenue Share Agreement
Revenue share agreements are an option for businesses seeking a lump sum of funding without the hassle and stress of fixed monthly payments. Essentially you take a loan from a revenue share lender who will take their repayment based on a percentage of your monthly revenue.
The benefit is that you are never paying back more than you made in revenue that month. The flexible payments allow you to keep money in your business and avoid sacrificing all of your cash flow and locking you into high monthly payments that put strain on your business during low revenue months.
Invoice Financing
You can use your existing, unpaid revenue to finance your business. Businesses that make payment requests from their customers using invoices have the option of invoice financing. You can sell your valid, unpaid invoices to an invoice financing agency in exchange for capital. The invoice financing agency will then collect on the invoice payments directly from the customer.
The financier will pay you up to 98% of the value of the invoices (although the average exchange for capital is around 50-80% of the invoice value). Once the lender collects on the invoices, your debt is paid.