Small business lines of credit: a guide

If you want cash to cover things as needed or back you up during a slow season, then a line of credit (LOC) might be a great fit.

A small business line of credit gives your business access to the on-demand funds it needs to grow or cover cash flow gaps or for everyday expenses. More flexible than a small business loan and usually less expensive than a credit card, these are a great way to make sure you’re prepared to cover whatever unexpected short-term costs come your way.

How a business line of credit works

A business LOC is a type of working capital business loan that works a lot like a business credit card with one key difference: You receive the funds as cash. Business LOCs typically have a credit limit between $1,000 to $250,000, which you can withdraw from as needed. Some banks can even offer business credit lines up to $500k or in the millions.

In some cases, each withdrawal turns into a short-term loan, which you repay plus interest and fees. Or you may be required to make a minimum monthly payment on the balance — similar to the way you pay off a credit card.

Most business credit lines are revolving, meaning the balance replenishes as you pay off your withdrawal. But in a few cases, lenders offer nonrevolving LOCs which can’t be used again after you pay them off.

After applying for a credit line, it may take a few weeks to get funding — usually up to two weeks, though unsecured LOCs typically have faster turnaround times.

Business credit lines rates and fees

Business LOC rates typically range from 8% to 24% APR, according to online business loan marketplace Lendio, which pulls these numbers from its network of over 75 lenders. But some online line of credit providers can charge as much as 80% or more, since there are no rate limits on business financing.

Many business LOCs have variable rates that change with the Prime Rate — such as Prime Rate + 1.99%. Your interest rate may increase or decrease every month or quarter.

The APR on your line of credit may also include fees in addition to interest. Fees common with credit lines include:

• Annual fees. Most LOCs have flat annual fees, usually around $100 to $200, with higher fees for higher credit limits.
• Origination fee. Can range from 1% to 10% of the loan amount.
• Maintenance fees. Often paid monthly or annually, lenders charge these fees to keep the credit line active.
• Withdrawal fees. Also known as draw fees, some lenders charge a fee each time you withdraw from the credit line.

If your lender turns each withdrawal into a term loan, you can have anywhere from six months to five years to pay it off in most cases.

Calculate monthly payments

Use our calculator to see how much a line of credit would cost your business each month, based on the rates you receive and the terms your provider is offering.

Secured vs. unsecured business lines of credit

Often, your business will choose between a secured line of credit and an unsecured line of credit.

• A secured line of credit is backed by your business’s assets — often inventory, accounts receivable or a general lien on business assets. This means if you default on your line of credit, the lender can seize the collateral to make up for the loss.
• An unsecured line of credit does not require collateral. However, many still require a personal guarantee from all small business owners with a 20% stake or more in the company — which is also required for most secured credit lines. This means the owners are responsible for paying the line of credit if the business can’t.

A secured line of credit often comes with lower rates and fees than an unsecured line of credit. And backing your credit line with collateral can help you qualify for a higher credit limit. However, unsecured credit lines often have a quicker turnaround when you first apply, since you don’t need to wait for the lender to appraise your business assets.

Compare small business lines of credit

View top lenders that offer business credit lines and other business financing options. Select Go to site to learn more about the product from the lender itself, or select More info to read an expert review. You can also select the Compare box for up to four providers to compare lenders side by side.

What you can do with a business credit line

You can use a business credit line for pretty much anything that requires working capital, like a short-term expense or emergency funding. Here are some common uses for business LOCs:

• Hire new employees
• Purchase inventory
• Fund an ongoing construction project
• Bridge cashflow gaps while waiting for clients to fill invoices
• Fund payroll during an off season
• Cover reopening costs
• Pay for an unexpected expense

Where to get a business line of credit

Business LOCs are a common product, and you can apply for one with most lenders that offers business loans.

Banks often offer the lowest rates and fees available. But they prefer to work with profitable, established businesses and business owners with good credit. And the application can be time-consuming.

The Small Business Administration (SBA) offers multiple business financing options. It guarantees lines of credit through the CAPLine program. These are available to established small businesses that have struggled to qualify for a bank line of credit. But they can be hard to find, even among SBA lenders.

Online lenders offer lines of credit that are often more friendly to startups and small business owners with less-than-perfect credit. Typically, applicants can get approved within 24 hours, with minimal paperwork. But these can come with higher interest rates and fees than you’ll find with other types of lenders.

Business line of credit requirements

Many lenders look at your business’s cash flow and collateral and your history of paying off business debts. Base requirements for a small business LOC typically are:

• At least one year in business
• Annual revenue of a minimum $100,000
• Personal credit score of 670

Many lenders rely on your personal credit score when you apply. But some might ask to see a business credit report — especially if you’re applying for a larger line of credit from a bank. Even if a lender considers your business credit score, you typically need good personal credit, or a score over 670, to qualify. Getting business loans with fair credit is possible, but your line of credit options are limited with a credit score below 580.

Startup lines of credit

If you have a new business or startup, some lenders cater to newer businesses with more flex requirements around time in business and annual revenue, some accepting as little as three or six months.

But a business line of credit might be off the table when you’re just getting off the ground. Entrepreneurs may want to consider using a personal line of credit for the first few months, alongside microloans and crowdfunding.

Document requirements

Plan on needing these items to apply for a business LOC:

• Bank statements
• Business and personal tax returns
• Profit and loss statements
• Balance sheets

You may need additional documents to verify cash flow, assets and current debts. Some lenders like Bluevine offer lines of credit without any document requirements, connecting to your business accounts instead. Bluevine isn’t your only option though, other lenders offer similar no-doc lines of credit that allow you to skip a majority of the paperwork.

Business LOCs have a high approval rate

Lenders approved 71% of business line of credit applications in 2020, according to the Federal Reserve. That’s the third-highest approval rate that year — and almost 15 percentage points higher than business loans. This means that lines of credit may be a better choice for small businesses that need instant approval and have struggled to qualify for traditional financing.

How to get the best business line of credit

The key is talking to multiple lenders and comparing all your options thoroughly.

1. Check your credit. Most business loan providers check your personal credit score, and many require a good credit score above 670. Check your credit score to know where you stand, and make moves to improve your credit before applying if needed.
2. Prequalify. In most cases, prequalification is a soft credit check that doesn’t impact your credit score, and it can give you a more realistic idea of what you can qualify for in terms of rates, loan amounts and other loan details.
3. Consider a lender you already work with. If you already have a business checking account with your local bank or credit union, they might be a good first stop. Business lenders tend to prefer lending to businesses they already have an established relationship with, and they may be more accommodating.
4. Quickly compare with marketplaces. There are many business loan marketplaces, such as Lendio and Rok Financial. With a quick online application, you can compare lender offers within minutes.
5. Compare, compare, compare. Many LOC options are available, such as revolving, nonrevolving, secured and unsecured — be sure to ask about all lending options with multiple lenders to find the best deal available and the one that best fits your business.

Pros and cons of business LOCs

Lines of credit can be highly beneficial to small businesses, but there are some highlights and drawbacks worth noting before you sign up.

Pros

• Low-cost emergency financing. LOCs offer a safety net for unexpected costs, helping you avoid expensive short-term loans.
• Pay on what you borrow. You only pay interest on what you use, rather than taking out a larger term loan more than you need.
• Less expensive than credit cards. You can often qualify for lower rates and fees than a credit card, helping you save on regular expenses.
• Cash not credit. LOCs offer cash for costs that you can’t throw on a credit card, like payroll, hiring contractors and paying rent or utilities.
• Build lender relationships. An LOC can help you develop a long-term relationship with a lender, which can lead to lower rates and loyalty discounts down the road — and build business credit.

Cons

• Lower amounts. Credit limits are often lower than term loans, making it less than ideal for a large, one-time expense.
• Minimum draw requirements. Minimum withdrawal requirements can force your business to borrow more than it needs.
• Extra fees. Business LOCs often have more fees than a term loan, such as draw fees, annual fees or maintenance fees.
• Variable rates. Variable interest rates are more common with lines of credit, and these typically increase when the economy is doing well and decrease during a downswing.

Starting a business? Consider a personal line of credit instead

Most business lenders prefer to work with established companies — that's because about half of small businesses fail in the first five years, according to the Bureau of Labor Statistics. There are financing options for businesses that have been around for as little as a year, but brand-new business owners should consider applying for a personal line of credit instead. Like any startup loan, your credit score and personal income matter are the most important factors that lenders look at when you apply. But personal line rates are typically lower than most startup financing options.

— Anna Serio-Ali, .

Business line of credit vs. credit card

A business credit card is similar to an LOC, but they often serve different purposes. Generally, a business LOC is better for expenses that take more than a month to pay off, while a credit card is better for small expenses that you can quickly pay off.

A business line of credit also gives your business access to cash, which can cover more expenses than a credit card. That’s why it’s useful for financing payroll, rent and utilities.

But a credit card can give you instant access to financing. While some lenders offer cards that you can swipe like a credit card, it often takes at least one day to receive a line of credit withdrawal.

Credit cards might have higher interest rates. But interest doesn’t apply if you pay off your balance in full each month. That’s not necessarily the case with a line of credit.

Business line of credit vs. loan

A small business line of credit and a term loan also serve different purposes. Generally, a line of credit is useful when you need to finance ongoing costs, while a term loan is better for large, one-off expenses.

Term loans are typically available in higher amounts and come with fixed interest rates. There are also more options for startups and borrowers with bad credit through the best working capital loans.

But you’ll need to apply again to receive additional funds. And in an emergency, term loans can take longer to receive than a line of credit. And lenders that promise a 24-hour turnaround are often more expensive than slower options.

Need more small business loan options?

A business LOC is best for established businesses that want extra cash to cover small, everyday expenses. If that’s not what your business needs, compare more small business loan options.

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