How does a business line of credit work?
A business line of credit works similarly to a credit card. With a line of credit, you receive access to a set amount of capital — say, $150,000 — and can draw funds as needed. You only pay interest on the funds that you draw.
Origination fee: Fee charged to process your application.
Account maintenance fee: Monthly or annual fee associated with managing your account and keeping your business line of credit active.
Draw fee: Fee charged each time you draw on your credit line.
Inactivity fee: A lender may charge this fee if you don’t draw from your line of credit within a specified period of time.
Secured vs. unsecured business lines of credit
Unsecured business lines of credit, on the other hand, don’t require collateral, but some lenders may still require a personal guarantee or a lien on a business’s assets.
When comparing lenders, ask whether they require collateral, a personal guarantee or a lien so that you can find the option that’s best for your business.
Business lines of credit vs. business credit cards
A business line of credit can provide a higher credit limit, may be secured by collateral and provides actual cash in your bank account when you make a draw. You can get cash with a business credit card, but you’ll be charged fees (usually called a cash advance fee) and a higher APR to do so.
Business credit cards work best for smaller ongoing expenses and for newer businesses without established finances, while business lines of credit work best for larger ongoing expenses and more mature businesses.
Where to get a business line of credit
Banks and credit unions
Although these lenders can offer business lines of credit with competitive interest rates, you’ll typically need to meet strict requirements to qualify. You’ll likely need to have strong revenue and credit history, and several years in business.
Compared to online lenders, banks and credit unions can also be more likely to require physical collateral to secure your credit line (especially for larger limits), as well as more likely to charge additional fees, including annual and inactivity fees.
Online lenders typically have streamlined application processes and fewer fees, and may be able to issue small-business lines of credit in a matter of days. However, these lenders are also likely to charge higher interest rates than banks and may have lower credit limits.
How to get a business line of credit
To get a business line of credit, you’ll initially want to determine how much funding you need and how quickly you need it. Next, you’ll want to evaluate your business’s credentials — time in business, annual revenue, personal credit score — to determine what lines of credit you can qualify for.
Once you have a better understanding of your financing needs and qualifications, you can research and compare lenders to find the right option for your business. Ultimately, you can apply for a business line of credit through a bank, credit union, online lender, or even work with an online marketplace to submit a single application and compare offers from multiple lenders at the same time.
Interest rates, borrowing limits and qualifications can vary by lender.
Personal and business tax returns.
Personal and business bank statements.
Business financial statements (e.g., profit and loss statement or a balance sheet).
You may also be required to provide physical collateral or sign a personal guarantee.
Depending on your lender, it may take anywhere from 24 hours to several weeks to complete the application, underwriting and funding processes.