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| Typical costs: | - Interest rates vary, but generally range from 9-15 percent based on the length of time in business, your personal and business credit history and other factors. Most lines of credit have variable interest rates based on a number of factors. For businesses with no credit record or a poor one, theinterest rate may be tagged to the current prime rate (which changes over time), plus an additional 1.5-10 percent, while a company with an extensive and positive credit history might be offered a line of credit at or even below the prime rate.
- Missed payments on a line of credit can increase the interest rate to 24-30 percent or more.
- Start-up or opening fees are generally $100-$250; or there's 1 percent Small Business Administration guarantee fee when opening a line of credit. A line of credit may have an annual fee of $100-$150, usually starting in the second year.
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| What should be included: | - A business line of credit is a promise from the bank to loan you anywhere from $10,000-$100,000or more when you need it, within a certain period of time. You don't start making payments or paying interest until you draw the money out; you only pay on the actual amount loaned, not the maximum possible; and if you pay back some of what you owe, you can borrow it again, up to your credit limit. IdeaCafe.com covers the basics.
- The difference between a line of credit and a traditional small business loan is that you don't make payments until you tap into the money, and you can keep drawing out more money as you need it, as long as you don't exceed the maximum limit. A line of credit is usually easier to get and has a higher interest rate than a standard business loan, but lower interest rates than a business credit card. SFGate.com gives an overview.
- Lines of credit can be unsecured or secured. An unsecured line of credit usually has a lower credit limit and higher interest rates. A secured line of credit is based on collateral such as the company's accounts receivable or inventory; credit limits can be up to 10 times higher for a secured line of credit over an unsecured one, and interest rates are usually lower. AllBusiness.com gives five reasons for opening a business line of credit and the advantages of a secured line of credit.
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| Additional costs: | - Late payment fees can run $15-75 or more<; penalties for going over the maximum amount can be $30-$50.
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| Shopping for a business line of credit: | - Get free, confidential advice on lines of credit and other financing from a business expert through the nonprofit SCORE.org.
- Generally a company needs to have been in business at least two years old to qualify for a line of credit, and have good credit established through its bank accounts, with its suppliers and with a business credit card. Check with your current bank to see what line of credit terms they offer.
- Terms and interest rates can vary a great deal on lines of credit, so compare several options. Business lines of credit are available from a number of banks and other sources, including American Express, Capital One, VISA and LendingTree.com
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Article updated November 2006 |
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