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Business line of credit: How it works and best options

Access to cash when you need it to cover a short-term expenses.

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Anna Serio
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A small business line of credit gives your business access to the on-demand funds it needs to grow or cover cashflow gaps. More flexible than a small business loan and cheaper 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.

To find the credit line for your small business, it helps to understand how this financing option works.

How does a business line of credit work?

A business line of credit is a type of business financing that works a lot like a business credit card. It gives your business access to a specific amount of funds, called a credit limit, which it can withdraw from as needed. Usually these range from $1,000 to $250,000.

Typically it takes between a few hours and a few days for a withdrawal to appear in your business bank account. In some cases, each withdrawal turns into a short-term loan, which you repay plus interest and fees. In others, the lender requires your business 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 that as you pay off your withdrawal, the balance replenishes. But in a few cases, lenders offer nonrevolving lines of credit. These can’t be used again after they’re paid off.

How to use a business credit line

You can use a business line of credit for any situation where you have a small, short-term expense or need emergency funding. Here are some common reasons businesses use a line of credit:

  • 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

Secured vs. unsecured business lines of credit

Often, your business will have a choice 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 a requirement for most secured credit lines. This means that 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 time when you first apply.

Pros and cons

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

Pros

  • A business line of credit gives you a safety net for unexpected costs, helping you avoid expensive short-term loans.
  • You only pay interest on what you use, rather than taking out a larger term loan more than you need — and paying more interest than necessary.
  • You can often qualify for lower rates and fees than a credit card. This can help you save on regular expenses that add up in the long run, like office supplies.
  • It gives you access to cash, not credit. Cash is often required for costs like payroll, hiring contractors and paying rent or utilities.
  • It can help you develop a long-term relationship with a lender, which can lead to lower rates and loyalty discounts down the road.

Cons

  • Credit limits are often lower than term loans, making it less-than-ideal for a large, one-time expense.
  • Minimum withdrawal requirements can force your business to borrow more than it needs. These are particularly common during the first six months your small business has a credit line.
  • Business lines of credit come with more fees than a term loan. This can make them appear less expensive than they actually are if the lender only advertises the interest rate.
  • Variable interest rates are more common with lines of credit. These typically increase when the economy is doing well and decrease during a downswing.

Where to get a business line of credit

Get a business line of credit from almost any lender.

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) 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 businesses 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.

Best business lines of credit

Our team reviewed over 220 business lenders before selecting these top picks for business lines of credit. We considered factors like interest rates, fees, credit limits and the time it takes to receive a withdrawal. We also made sure to include options available to businesses in different stages of growth and credit types.

Bank of America business loans

Finder rating 3.6 / 5 ★★★★★

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Bank of America offers an unsecured business line of credit with a low starting rate of 5.25% and credit limits beginning at $10,000 — low for a bank. It's also easier for small businesses to qualify than with most banks, only requiring two years in business and $100,000 in annual revenue. This revolving business line of credit is renewed each year, giving you the chance to qualify for lower rates. While Bank of America paused its lending program to focus on the Paycheck Protection Program (PPP), it's expected to relaunch its regular lending program soon.

BlueVine business lines of credit

Finder rating 4.5 / 5 ★★★★★

Read Review
You can apply for a business line of credit from BlueVine from your computer — or even your phone. It takes around five minutes to get approved and you can receive each withdrawal within a matter of hours — for a fee. Its low starting rates of 4.8% are comparable to a bank. And there are no monthly maintenance, withdrawal or origination fees. Business owners with fair credit and less than a year in business can also qualify. But some withdrawals might come with weekly repayments, which can be inflexible for businesses struggling with cash flow.

OnDeck business lines of credit

Finder rating 4.7 / 5 ★★★★★

Go to site Read review
While other online lenders might offer same-day funding on their business lines of credit, few are as fast as OnDeck. You can receive funds within 30 minutes of sending a request at no extra fee — as long as the transaction is between $1,000 and $10,000. And it's available to business owners with fair credit and just one year in business — though qualifying industries may be limited. But this business line of credit is expensive. The average APR is close to 48%, far higher than your typical credit card. And it comes with a $20 monthly maintenance fee.

Fundbox lines of credit

Finder rating 4.2 / 5 ★★★★★

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Fundbox is one of the few online lenders that requires absolutely no paperwork during the application. Instead, FundBox asks small business owners for access to their accounting software. You can receive withdrawals as soon as the next business day and there's no penalty if you pay off your credit line before it's due. But it's not completely clear about how its pricing structure works — it doesn't specify if the rate it advertises is monthly or annual. And the maximum credit limit is also lower than you can find with other providers.

Lendio business loans

Finder rating 4.75 / 5 ★★★★★

Go to site Read review
With over 300 partner lenders, Lendio is one of the largest online business loan marketplaces. By filling out its online form, you can prequalify with multiple providers and compare personalized offers. This can be particularly helpful if you have a low credit score or are in the startup phase of your business. Its partners offer business lines of credit with credit limits as high as $500,000 and rates from 8% to 24% APR. It typically takes a week or two to fund a business line of credit outright. But the time it takes to receive a withdrawal is likely faster.

Business line of credit requirements

Most lenders require small businesses to be open for at least one year and have an annual revenue of a minimum $100,000. Most also require business owners to have good credit, or a personal credit score of at least 670. And many look at cash flow, collateral and your history of paying off business debts.

And there are options for businesses that don’t meet the standard credit or time in business requirements. But it can be difficult to qualify for a business line of credit if your business is less than one year old. Startups that need help with short-term expenses might want to consider a microloan instead. And while it’s possible to get a business line of credit with fair credit, your options are limited with a credit score below 580.

Document requirements

While it varies depending on the lender, most ask to see bank statements, business and personal tax returns and financial statements. Financial statements often includes profit and loss statements, balance sheets and anything else that can verify your business’s cash flow, assets and current debts.

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.

Business line of credit vs. credit card

Business lines of credit and credit cards might be similar, but they serve different purposes. Generally, a business line of credit 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 when it comes to financing payroll, rent and utilities.

But a credit card can give you instant access to financing. While some lenders like Kabbage 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.

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.

Bottom line

A business line of credit can be a great asset to small business owners that regularly need access to funds. It’s a particularly great source of working capital for businesses struggling through an off season or an uncertain economy.

Compare even more options by using our business loan comparison tool.

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