Business Line of Credit

Similar to a credit card, a business line of credit is a form of flexible revolving credit that also gives you access to cash.

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At a Glance

Flexible, convenient, and easy to use, a business line of credit gives your company quick access funds. A line of credit is ideal for emergency expenses, temporary downturns, or unanticipated opportunities while only paying interest on the funds you actually use.

amount
Loan Amount $10,000 - $1 million
term
Loan Terms 6 months - 5 years
rates
Interest Rates 7 - 25%
speed
Time to Funding As little as 48 hours

Advantages & Disadvantages

  • Bad credit OK
  • A safe credit-building tool
  • Only pay interest on funds drawn
  • Quick & convenient access to working capital
  • Appropriate for a variety of business purposes
  • Updated financials frequently required
  • Lender can close line of credit anytime
  • You may be required to provide collateral
  • Poor credit gets you a higher interest rate

What Is A Business Line of Credit?

A line of business credit is a convenient way to finance your small business without having to borrow more money than you need.

It essentially combines a credit card’s access to working capital with the interest rates of a small business loan

But that doesn’t mean a line of credit is a free ride.

Best Line of Credit for Business

Credit TypeAmountCostTermsTime to Funding
Business Line of Credit$10,000 - $1 M7 - 25% APR6 months - 5 yearsAs little as 48 hours
Business Credit CardsUp to $50,000Intro APR 0% - 24.99%Revolving credit, usually paid monthlyAs little as 60 seconds
Business Charge CardsNo predetermined spending limitAnnual fee + late payment feesPay balance in full every monthAs little as 7 days

How Business Line of Credit Works

Similar to a personal credit card, you receive financing from a lender up to a predesignated amount.

You don’t have to take out the entire amount at once, but can instead just use what you need when you need it.

So you only pay interest on the funds you withdraw while still having access to your remaining balance.

A business line of credit is a type of revolving credit because your available credit goes back up as you pay off your outstanding debt.

Let’s take a look at an example…

Say you own a bakery and you walk in one morning to find that your convection oven has gone on the fritz.

Your repairman confirms that the damage is irreparable and it’s time to replace it.

Luckily, you have a business line of credit that goes up to $50,000.

You only want to borrow $15,000 to pay for a new oven so you withdraw those funds and begin making payments.

At that point, your available credit is reduced to $35,000 but once you pay back your outstanding balance, your line of credit goes back to the full $50,000.  

Secured vs. Unsecured Business Line of Credit

Typically, you can receive one of two different types of small business lines of credit: unsecured or secured.

  • An unsecured business line of credit doesn’t require any type of collateral: just your personal guarantee.
  • A secured line of credit, on the other hand, requires you to use some type of property as collateral. In the event you default on your payments, your lender can use your collateral as payment towards whatever you owe.

Since a secured line of credit is less risky for lenders, you may qualify for better rates and repayment terms than you would with an unsecured loan.

At the same time, you should be willing to lose whatever property you use as collateral in case the unforeseen happens and you can’t make your payments.

Learn more about The Relationship Between Collateral and Small Business Credit

What's the Cost of a Business Line of Credit?

The biggest cost involved with a small business line of credit is interest.

The amount you’ll pay depends on a number of factors, including the strength of your application and the lender you choose, but business line of credit rates can start as low as 7% and go as high as 60%.

You might also encounter origination fees, draw fees, and maintenance fees depending on the lender.  

Advantages of Business Lines of Credit

Only Pay Interest on Funds Drawn

The most notable benefit is that you only pay interest on the funds you actually draw from your account, saving you money over time.

This is because you won’t have to go through the process of estimating what a business expense might cost you, then adding in a buffer to your loan request just in case something goes over budget.

With a corporate credit line, you can wait until you actually need to use the money and only take out money when you’re ready to pay for a bill.

You don’t end up paying interest on money you didn’t end up using.

Funds Are Available When You Need Them

The next big advantage of getting a business line of credit is timing.

Rather than waiting for an emergency and then applying for a loan, you always have funds available.

You don’t have to waste time shopping around for different lenders and waiting for loan approval in the midst of a major headache at your company.

Plus, you don’t need a specific purpose with a line of credit.

The funds are simply used for whatever working capital you need, instead of one thing you listed on your loan application.

This provides you with a lot of flexibility to help your cash flow and your balance sheet.

Learn more about How To Increase Cash Flow When You’ve Hit A Business Plateau

Builds Your Business Credit

Another way a business line of credit can help you?

It can actually increase your credit score.

That’s because most lenders report your timely payments to the credit bureaus, which builds your positive credit history.

And with payment history accounting for the largest percentage of your credit score, you can quickly start seeing results.

Disadvantages of Business Lines of Credit

There are a lot of advantages surrounding a business line of credit, but this type of short-term financing comes with it’s own set of disadvantages too.

Financial Verification

For one, you may be required to provide your lender with updated financials on your business when you’re ready to draw on your account.

It may be cumbersome, but it reassures your lender that your business is still viable and able to make the repayments.

Offering Up Collateral

As mentioned earlier, you may also be required to provide collateral for a new business line of credit.

The kind of collateral accepted varies lender by lender, but typically you can use personal property like a vehicle or boat, a savings account, or sometimes business inventory or other assets.

Variable Interest Rate

Small business lines of credit also use a variable rate rather than a fixed rate.

Usually it’s calculated as the prime rate plus an additional number of percentage points.

If the prime rate changes, your interest rate correspondingly changes as well.

On Demand Status

Another feature of lines of credit for business is what’s known as “on demand,” which allows your lender to close your line of credit at will and require your balance to be paid within 30 to 90 business days.

It’s important to use your business line of credit strategically so that you’re not overburdening your financial situation.

Higher Interest for Poor Credit

Finally, as with any type of financing solution, you’ll pay more if you have bad credit.

While that can be good news because you actually can get a line of credit for bad credit, you should still realize that your interest rate will undoubtedly be higher compared to someone with a strong credit history.

Learn more about Why Personal Credit Still Matters for Business 

When to Use a Business Line of Credit

A line of credit for small business is best used for short-term financing.

This is true for a number of reasons.

Obviously, the longer it takes you to repay your balance, the more interest you’ll end up paying.

Plus, depending on how much you’ve spent, your remaining line of credit is limited until you pay off what you owe.

There’s also the added pressure of your lender being able to call in what you owe on demand.

Improve Cash Flow

All the same, short-term financing with a line of credit can help you with a large variety of cash flow issues for your business, both positive and negative.

According to the Small Business Administration, the three most common reasons an existing business borrows funds is to purchase inventory, expand the company, and strengthen the firm.

Learn more about The Small Business Administration

Alleviate Growing Pains

Having access to capital allows you to quickly seize on a profitable business opportunity.

Let’s say, for instance, you sell a line of organic baking mixes.

You sell quite a bit online and are in a few regional specialty stores.

Whole Foods approaches you with a huge wholesale order, but you don’t have the working capital to fill the order with your manufacturer.

A business line of credit financially tides you over between the time the order is placed and when it’s paid.

Learn more about Making the Most of Business Financing

Handle Emergencies

A line of credit also helps you finance an emergency.

Remember the previous example of a bakery needing a new commercial oven.

Business would be stunted without the right equipment and traditional loans can take weeks to be approved —

Assuming you’re approved at all.

With a line of credit at your disposal, you can quickly take care of emergency expenses without putting your ongoing revenue at risk.

And while you might get similar convenience from a business credit card, you typically see much lower interest rates with a line of credit, as well as fewer fees and more flexible repayment terms.

Learn more about the Differences Between Business Credit Cards, Charge Cards, and Lines of Credit

How to Qualify for a Business Line of Credit

Obtaining a business line of credit can be quite an easy process if you’re organized and prepare your information ahead of time, rather than scrambling for documents as your lender requests them.

While you’ll have a better chance of qualifying if you have a more established business and a good credit history, it’s still possible to get a line of credit if your business credit history is less-than-impressive.

Demonstrate Ability to Pay

Business line of credit requirements typically include your personal credit score as well as your business’s financials.

The lender will probably want to review your revenue figures, profit and loss statements, and other documentation demonstrating you the health of your business.

A positive cash flow is a huge indicator of your company’s success, and is usually a must for having your application approved.

Keep Credit Utilization Low

You’ll also want to make sure your other levels of debt are minimal.

While acceptable debt ratios vary lender by lender, you don’t want to appear overburdened by other financial obligations.

Apply During Peak Season

Another tip is to apply for a business credit line before you actually need the cash.

In other words, don’t apply in the middle of your slow season when your numbers look deflated.

Apply when your company is at its best so you come across as a responsible applicant who is able to make payments on time as needed.

Don’t wait until you’re cash-strapped and desperate for capital.

Be prepared by having a line of credit at your disposal so that you can meet both challenges and opportunities head-on and come out on the other side stronger than ever.

Choosing the Right Lender

Getting the best business line of credit is often dependent upon selecting the right lending institution.

When shopping for a business line of credit, carefully consider the following:

Amount of Credit

First think about how much money you actually want access to.

If you’re a new business, you can do this by thinking of a worst case scenario, like having to replace your most expensive piece of equipment.

If your company is more established, look back throughout your history and identify the largest expense you’ve ever had.

Either method is a good starting point to figure out how large of a line of credit you should request from a potential lender.

Interest Rate

Comparing interest rate offers is also one of the most important things because that determines how much it will cost you to repay your balance once you actually start using your line of credit.

Don’t assume that just because one lender offers you a certain rate that you can’t get a better rate with another lender.

Learn more about How to Calculate APR vs. Interest Rate on a Loan

Repayment Terms

Also consider what type of repayment terms you’ll receive.

Will you be required to make payments daily, weekly, or monthly?

Or do you want to try to find a lender with an even more flexible repayment schedule?

Look at your business’s cash flow to determine what works best for you.

Do you typically receive revenue on a regular basis throughout the month?

Or does your cash flow come in once every month or two?

Be realistic about your own cash flow so that you can set yourself up for success rather than adding an unnecessary challenge to your business.

Banks Aren’t the Only Place To Get Loans

The type of lender you consider can also impact how your application is handled.

Alternative lenders and institutional lenders had the highest loan approval rates for small business financing, while big banks had the lowest amount of approvals.

Looking at a wide variety of lenders will ensure a diverse selection of offers.

Learn more about Why Small Businesses Don’t Get Loans From Big Banks

How to Apply for a Business Line of Credit

In order to expedite the process, you should have certain documents ready before applying for a loan.

Here’s what you’ll need to apply for a business line of credit:

  • Driver’s License
  • Voided Business Check
  • Bank Statements
  • Balance Sheet
  • Profit & Loss Statements
  • Credit Score
  • Business Tax Returns
  • Personal Tax Returns
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