4 business credit myths debunked
There are a lot of rumors out there. Get the facts on what it means to tap into a business line of credit.
Many people have credit cards and are familiar with term loans. But business lines of credit are often not well understood because they offer some of the benefits of both credit cards and loans.
Like a credit card, a line of credit is flexible in that you can tap into it anytime up to your preapproved limit. The difference is that you get cash to spend however you need to. For example, a business owner could apply for a line of credit to cover the cost of new office furniture, or another major expense. The exact amount of credit and interest rate that they end up receiving would be dependent on a host of factors, such as their credit score, and they might not receive as much as they would have if they'd taken out a term loan. But a business line of credit could still potentially provide them with tens of thousands of dollars in fast capital with a lower interest rate than the typical credit card.
While a business line of credit has many benefits, it’s not always the right tool. Distinguishing fact from fiction can help you decide whether a line of credit can make a difference for your business.
Myth #1: The application process is long and complicated.
Every lender’s application process for a line of credit is slightly different. In general, you submit an application that includes financial data and other information. In many cases, a loan officer schedules an interview to ask questions and address concerns. If this sounds like a lot, it isn’t — especially if you already have a banking relationship with the lender.
Some lenders have an online application process that can be completed in minutes. If you’re applying to a lender you bank with, your banker is usually happy to help with your application and answer questions ahead of time. Business line of credit applications are often approved within a couple of weeks or even — if the transaction is simple — a few days. Having a business bank account with your lender can help speed up this process.
Myth #2: You need a perfect credit score to get a business line of credit.
The better your credit history, the stronger your application will be. However, many businesses with a short credit history or mistakes in their past may get approved for a business line of credit. What matters most is your recent history. Do you have a business credit card? Have you made all your payments on time in the last 12 months?
If you have so-so credit, you may start out paying a higher interest rate. But during the annual review for your line of credit, you may be able to get your lender to bring the rate down if you’ve been using your credit responsibly.
Myth #3: Only a failing business needs credit.
Many people think a business that borrows money must be on its way down. In fact, the opposite is often true. Lenders typically don’t want to give money to a business that isn’t doing well, because a failing business is unlikely to pay back its debt. Businesses with strong revenues and good cash flow make ideal borrowers.
Why would a successful business want to borrow? It comes down to opportunity cost. Borrowing with a business line of credit can help a seasonal business be ready for when sales start heating up, can provide flexibility to buy inventory at a discount or provide cash flow to keep operations running smoothly. A business line of credit is a way to have cash available to seize opportunities at a moment’s notice.
Myth #4: If you’ve never borrowed, you have good credit.
A good credit score isn’t something you’re born with. It’s built over time — by borrowing.
Many businesses start with a credit card to establish a credit history. As the number of transactions and monthly payments grows, their credit scores typically improve. After achieving a good credit score, they apply for a line of credit or term loan. A business that makes no effort to establish credit might have a hard time borrowing when it needs capital.
Talk with a myth-buster.
Have questions about what a line of credit could mean for your business? Speak with a Chase banker in your area.