How to Set Up Line of Credit Account in Quickbooks
What is a credit line?
A business credit line, also known as a 'line of credit', allows companies to borrow money up to an agreed limit when needed. For example, it can take a lump sum and draw down smaller amounts from the pot when needed.
Business lines of credit fall into two categories:
- Secured: a secured business line of credit requires the borrower to use their assets as collateral against the loan. The lender will take the collateral if the business fails to pay back what they borrow.
- Unsecured: an unsecured business line of credit doesn't require the borrower to use their assets as collateral against the loan. Unsecured lines of credit tend to have lower credit limits and higher rates of interest.
How does a business line of credit work in the UK?
A business line of credit offers flexible repayments, unlike a business loan or business credit card. When you borrow money with a business line of credit, you and the lender will agree on a date when it must be repaid.
The repayments are not fixed into monthly instalments, but you must repay by the date specified in your agreement. That means that you could pay off your line of credit early without having to pay early repayment charges.
As well as this, you only have to pay interest on the money that you draw down.
For example, if you have a business line of credit from a lender for £20,000 and you only draw down £5,000 to restock inventory, you will only be charged interest on the £5,000.
There are two types of credit line agreements for businesses:
- Revolving business credit lines: allow you to keep drawing down money up to your credit limit and once it's repaid your balance tops up again and you can borrow more money from the same account.
- Non-revolving business credit lines: allows you to draw down money up to your credit limit but once you've used your quota, you can't have anymore – even when you've paid it back.
Common uses for a business line of credit include financing:
- new assets or equipment
- business expansion
- startup costs
- cash-flow problems
How much of a line of credit should a business have?
The lines of credit a business should have will vary depending on its financial circumstances. It is important to consider whether you can afford to take out a line of credit before making an application.
What are the advantages of a business line of credit?
Business credit lines can open up new funding opportunities for companies. The benefits of a business credit line include:
- Flexible repayments: a business line of credit can be paid off early without incurring any early repayment fees.
- Speedy application: you can apply for a business line of credit quickly online and some lenders will decide within 24 hours.
- Improve cash flow: a line of credit can help to keep your business running if you have a short-term cash flow issue such as invoices taking longer to be paid.
What are the disadvantages of a business line of credit?
There are some disadvantages of a business line of credit that are worth considering before making an application. These include:
- Fixed commitment period: lines of credit are open for an agreed period of time only, after which the account will be closed. You will have to reapply if you need to borrow more money, even if you haven't used any funds.
- Higher interest rates: business credit lines may have more expensive interest rates than loans or credit cards.
- Short-term financing: business lines of credit are short-term funding solutions, so you may need to consider alternative forms of business finance if your business needs long- term funding.
Is a credit line a good idea for my business?
A business line of credit may be a useful source of finance if your company needs to borrow money multiple times during the year. For example, if you forecast that your business may have cash flow shortfalls or need funds to help it expand.
Is my business eligible for a line of credit?
The eligibility criteria to qualify for a business line of credit may vary between lenders, so it is important to check their terms and conditions before applying. Some lenders may require your business to be running for a certain amount of time or have a minimum sales threshold.
How to open up a business line of credit
Most lenders let you open a business line of credit online and will ask for the following information when you apply for an account:
- Funding amount: how much money you need to borrow and for how long.
- Business details: the name, legal status and contact details of your business.
- Business finances: including turnover, invoices and bank statements.
- Contact details: your name, address and contact information.
How much can I borrow?
Lenders may offer a business credit line of anywhere between £1,000 and £10 million. The amount your business can borrow will vary depending on the lender and your financial circumstances. Each lender will use your application to decide how much to lend your business and for what period of time.
What interest rate or APR do I pay?
The interest rate, or APR, that you pay will vary depending on the lender and your credit agreement. Overall, interest rates for a line of credit tend to be higher than interest rates for a business loan or credit card.
How long does it take to get a line of credit approved?
You can apply for a business line of credit within a matter of minutes and some lenders make a decision about your application within 24 hours.
What's the alternative to a credit line for businesses?
Alternatives to a credit line for business include:
- Asset finance: helps businesses get funding for a specific asset, such as office supplies, new machinery or vehicles.
- Business loans: secured and unsecured business loans allow companies to borrow lump sums and make fixed repayments including interest.
- Business credit cards: offer businesses a fixed credit limit that can be used for everyday spending and large purchases. Most credit card balances must be paid off in full each month or will incur interest.
- Business overdrafts: some business bank accounts come with an overdraft that can be used for day-to-day business expenses.
- Government funding: eligible companies can apply for government grants to secure additional funding.
» MORE: Do I need a business bank account?
How does Nerdwallet's business credit line comparison work?
Our business credit line comparison table shows the features and services offered by each lender.
You can use our account breakdown to compare each credit line. You will be able to see available amounts, minimum turnover and available terms and decide which one could help you manage your company finances.
Business Credit Lines FAQ
Does a business line of credit affect your credit score?
When you apply for a business line of credit, most lenders will do a soft credit check to verify the identity of your business, which won't affect your credit score. Some lenders may request a hard credit check when you are negotiating the credit agreement, which will leave a visible mark on your business credit report and may affect your credit score.
What are draw and repayment periods?
Draw and repayment periods are the durations of time that you can draw down money from your line of credit and repay what you use. During a draw period, you will be using money from your line of credit. During a repayment period, you will be expected to repay the interest and principal of the loan.
Do credit lines have closing costs?
Most of the time there are no charges to close your business credit line account so long as you keep up with the repayments. Some credit lines will have closing costs and It's important to factor these fees into your considerations when you are evaluating which lenders and financial products are right for you. If there are no closing costs, once your agreement ends, your account will close automatically without any fees. You may have to pay additional fees or interest if you miss repayments and your agreement has to be extended. This will be decided by the lender on a case-by-case basis.
How to build/increase your business line of credit?
Some providers let you apply for a credit line increase through your online account. They will usually give you a decision within a few hours of your application. It is important to check that a lender offers the opportunity to increase your loan before applying for a line of credit if you think you will need to borrow more money.
How is a business credit line repaid?
If you borrow money using a business line of credit, you and the lender will agree on a date when it must be repaid. The repayments are not set monthly instalments, but you must repay by the date specified in your agreement. That means that you could pay off your line of credit early without having to pay early repayment charges.
Can I get ongoing funding for my business?
Some lenders offer revolving credit lines that allow you to draw down money from your credit limit and, once it has been repaid, your balance tops up and you can borrow more money from the same account.
Are there risks of over-using a line of credit?
Overusing a business line of credit could cause your company to become stuck in a cycle of borrowing. Business lines of credit usually charge higher rates of interest, which can be expensive for long-term borrowing too.
How to Set Up Line of Credit Account in Quickbooks
Source: https://www.nerdwallet.com/uk/business-loans/credit-lines/