Business Line of Credit: How It Works & Best Options

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.

You then repay the funds over time, typically on a weekly or monthly schedule. Many lenders allow you to repay your full balance early to save on interest costs. Some lenders charge additional fees, such as:
  • 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.

You can continue to draw on your business credit line as often as you’d like, as long as you make payments on time and don’t exceed your credit limit. Because small-business lines of credit are revolving, they’re much more flexible than business term loans, which require you to repay a lump sum of funds over a fixed term.

Secured vs. unsecured business lines of credit

A secured business line of credit requires you to put up assets such as inventory or property as collateral. If you fail to pay back the credit line, a lender could seize your assets.

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.

A personal guarantee gives a lender the right to go after your personal assets, like your house, if you default on a loan. A lien is similar; a lender can seize your business assets if you haven’t repaid a loan.

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

Business credit cards are technically lines of credit, but they differ from traditional business lines of credit in several ways.

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, however, can provide rewards or cash back for spending — which is not something offered by traditional lines of credit. Rewards are typically related to business expenses, such as office supplies, gas, internet and cable. They may also offer 0% interest promotions, which allow you to pay no interest on your balance for a specific time period after signing up for the card.

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

Banks and credit unions can offer different types of business credit lines, including secured and unsecured business lines of credit, as well as SBA lines of credit.

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

Online lenders, like Bluevine and Fundbox, generally have more flexible business line of credit requirements compared to banks and credit unions. Some online lenders will work with startups or businesses with bad credit.

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.

As part of your application, lenders will typically consider your credit and financial history — and ask you to provide documentation, such as:
  • 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.

Find the right business loan

The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. IHowBlog recommends comparing small-business loans to find the right fit for your business.

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