Business Line of Credit

Small businesses have many funding options. Many of those options, however, come with restrictions, collateral, interest rates, and hefty monthly payments that can hamper a business. That’s why business lines of credit are such an attractive option for businesses that need only a small influx of cash.

The Federal Reserve’s 2023 Small Business Credit survey found that 43% of small businesses that sought financing pursued a business line of credit, while just 36% pursued a loan.

What is a small business line of credit?

A business line of credit is a type of small business financing that’s like a cross between a business loan and a business credit card. A lender approves an unsecured line of credit that a business owner can draw on to make general business purchases.

Unlike a loan, you don’t need to provide collateral to secure credit, and there isn’t a lump-sum payment that must be paid back with interest over a period of time. Rather, a business line of credit gives a business owner the option to use some or all of the funds and pay them back in a timely manner to restore the full credit amount.

For instance, say you were approved for a $10,000 line of credit. You use $2,000 of that credit at the start of the month to buy a new laptop. At the end of the month, you receive a large payment from a client, allowing you to repay the $2,000 you drew from the line of credit before too much interest charges accrue. At the start of the next month, you’ll have the full $10,000 available to draw from once more (assuming your business is still eligible, of course).

Like a loan, a business line of credit gives you access to an approved amount of financing. Like a credit card, the amount available is revolving and depends on how much you’ve already drawn (or borrowed). Interest accruals only apply to the drawn amounts, rather than the full approved limit. However, there can be maintenance fees for opening and keeping the line open, so you should pay close attention to the terms of the agreement before you sign.

How can I use a business line of credit?

A business line of credit is more flexible than other financing types, which is one of the reasons why so many business owners like them. Most of the time, you won’t need to provide a lender with specific details on what you’ll use the funds for

Some of the most common uses of a business line of credit include:

• Safety net: Should the business fall on lean times, a business line of credit is ready cash to cover expenses like payroll, rent, and equipment leases until you can find more steady capital.
• Seasonal lulls: For businesses that face a slow offseason, a business line of credit can help them stay afloat until business picks back up.
• Support demand spikes: When business booms unexpectedly, a business line of credit can finance the necessary production increases and inventory management required to meet demand.
• Growth: Business lines of credit are typically limited to $250,000 or less, so they’re not often used for major growth campaigns, but they can finance growth-minded purchases like new equipment or technology.

How to get a business line of credit

Getting a business line of credit isn’t as complicated as applying for a traditional loan or trying to secure an investment. The process is straightforward.

1. Decide how much credit you need

The first step to getting a business line of credit is figuring out how much you’ll need. Businesses use lines of credit for different purposes. While some businesses may view a line of credit as a safety net, others may see it as a flexible way to support small, sustained growth. Whatever your needs, since you only pay interest on what you use, you may want to apply for a slightly larger amount than what you really need to meet your goals.

That said, don’t get greedy. Business line of credit interest rates range from 8%* all the way to 60%, so it’s imperative that you don’t borrow more than you can pay back in a timely manner. You can always request a credit increase later, although it may require collateral to get the full amount you desire.

2. Get your business in good shape to apply

Poor credit is by far the most common reason businesses get denied financing. Such is the case with a business line of credit. To ensure the highest likelihood of securing your business line of credit, you’ll need the following:

• Credit history: Most lenders require business owners to have a credit score of at least 680, although some lenders will accept scores as low as 580. (You’ll just have higher interest rates.)
• Business revenue: Banks and credit unions typically require a minimum annual or monthly business revenue of at least $3,000 to approve a business line of credit. Online lenders may not have a minimum.
• Time in business: Some lenders may require just six months in business, but many require at least one to two years before approval.
• Paperwork: To get approved quickly and secure the best interest rate possible, have all of your paperwork ready, including balance sheet, bank statement(s), profit and loss statement, business tax return, and personal tax return.

The better each of these items looks, the more likely you are to be approved for more credit at a lower interest rate. If your business is in a bit of a lull or your credit history isn’t great, take some time to build up your credit and show stronger monthly business revenues before applying.

3. Compare lenders and rates

There is no shortage of options when it comes to business lines of credit. Major banks, credit unions, and credit card companies all offer business lines of credit with variable terms and interest rates. Many online lenders also offer business lines of credit. When shopping, compare the annual percentage rate (APR), fees, and terms to find what makes the most sense for your business.

Generally, traditional banks and credit unions are best for businesses with established histories, revenues, and strong credit scores, while online lenders are more accessible for new businesses or business owners with low credit scores.

4. Submit your application

When you’ve gotten your business profile in good shape, gathered all your paperwork, and done the research, it’s time to apply for a business line of credit. During the research process, you’ll likely have figured out if you can submit your application online or if you must do so in person. Turnaround times vary by lender, but approval can happen as quickly as 24 hours or take 30 days or more.

Common information you may need for your application includes:

• Your name
• Business name
• Social Security number (SSN)
• Business Tax ID
• Annual revenue
• Desired loan amount

What are the requirements to get a business line of credit?

To qualify for a business line of credit, businesses typically need to see at least the following:

• 580 credit score: Some online lenders will accept credit scores this low, but traditional lenders often require at least 680.
• 6 months in business: Traditional lenders may require one or two years in business, but online lenders are more willing to work with brand-new businesses.
• $3,000 monthly business revenue: Many lenders require a minimum of $10,000 in monthly revenue, but there may be some options for companies making less than $100,000 per year.
• No major credit events: Recent bankruptcies, foreclosures, liens, or other major negative impacts to your credit score may disqualify you from a business line of credit.
• Collateral: To get a credit increase or a very high credit amount, you may need to provide collateral, like accounts receivable or personal assets, to secure a business line of credit.

Pros and cons of a business line of credit

Like any business financing option, business lines of credit have pros and cons, and may not be the best solution for all businesses.

Is a business line of credit right for me?

A business line of credit is a good financing option for nearly all small businesses.

With lower barriers to approval and a wide range of options on the market, a business line of credit can give new businesses, business owners with poor credit, and businesses making small annual revenues access to quick cash. As long as you pay back what you borrow within the statement term, you won’t pay any interest. (Although high interest rates can turn a business line of credit burdensome if you draw more than you can afford to pay back quickly.)

Due to the relatively low maximum credit amounts, businesses that are growing rapidly or make several million dollars in annual revenue may be better served by a traditional business loan or revenue-based financing.