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What is a business line of credit?
Financing ideal for ongoing costs that are difficult to nail down.
A line of credit can be helpful when you have an ongoing project with expenses that are hard to predict. They can sometimes have lower rates than a credit card, higher credit limits and allow you to access cash for expenses like paying a contractor. But they’re not ideal for a one-time business expense.
What is a business line of credit?
A business line of credit is a type of financing for small businesses that gives you regular access to funds. It’s similar to a credit card: Your business qualifies for a credit limit and can withdraw funds as needed.
Credit lines can come with fixed or variable rates that can run anywhere from 8% to over 80%, though SBA credit lines start lower. While not all come with a specified loan term, those that do often run anywhere from one to 10 years. How you pay it back and whether you can withdraw again after you make repayments varies by lender.
What types of business credit lines are available?
You have four main types of business lines of credit to choose from. Which is right for you depends on your business’s priorities:
- Unsecured line of credit. A line of credit that doesn’t require collateral. It often has the fastest turnaround, but can be more expensive.
- Secured line of credit. A line of credit backed by collateral, like real estate or equipment. The application process can be longer, but it typically comes with more competitive rates and higher limits.
- Revolving line of credit. A line of credit that comes with minimum monthly repayments, rather than breaking up your withdrawals into fixed installments.
- SBA CAPLine. A line of credit partly backed by the Small Business Administration (SBA) with limits up to $5 million, rates capped at prime plus 4.75% and terms of five or 10 years.
How much can I borrow?
Lines of credit generally range from $1,000 to $250,000 if you borrow online or from a local bank. But it depends on your lender and whether you apply for a secured or unsecured option.
If you go to a large or even regional bank you can sometimes borrow as much as $3 million if you back your line of credit with collateral. Some banks don’t even have a maximum for their credit lines. And SBA CAPLines run as high as $5 million.
How can I apply for a business line of credit?
You can usually apply for a line of credit online, over the phone or in person — it all depends on the type of lender you’re working with. Typically, you can get started by filling out a quick online form. If you prequalify, you might be able to complete the application online. Alternatively, some lenders might call you, reach out by email or set up a meeting to iron out the details in person.
If you accept the initial offer, your lender might ask for additional information or documents to verify your application. These might include tax returns, bank statements, financial statements or proof of collateral.
Is a loan connection service a direct lender?
No, connection services are companies that can help you prequalify with multiple lenders by filling out one online form. They’re useful if you want to compare personalized rates at once, though they won’t ultimately fund your line of credit. Instead, you’ll have to apply with the lender you’re connected with to get approved, withdraw funds and pay off your balance.
How long does it take to get a credit line for my business?
It depends on your lender. Online providers are typically the fastest and can get you access to your credit line in as little as one business day. Banks and credit unions can take as long as a week or two. SBA CAPLines generally have the longest turnaround and can take several months from start to finish.
Compare business lines of credit
How do repayments work?
That depends on the type of credit line you take out and your lender. In some cases, your line of credit might come with a draw period, where you can withdraw the funds you need for your project while making minimal monthly payments. At the end of the draw period, you repay the balance in fixed installments over a term of one to 10 years.
Other lines of credit turn each withdrawal into a short-term loan, which your business begins repaying immediately. In this case, there’s usually no time limit to how long you can withdraw from the credit line. Sometimes, you have to reapply for a new line of credit once you’ve borrowed up to the credit limit. Other times, your balance renews once you pay off the amount you borrowed.
How repayments work on a revolving line of credit
A revolving line of credit works a lot like a credit card. You can withdraw from it as needed and pay off your balance with minimum monthly repayments. And your balance renews once you pay it off. This gives you more flexibility than other types of credit lines, but can become more expensive if you let your balance sit and gain interest.
What happens if I can’t repay my line of credit?
It depends on the type of credit line you have and how late you are on your loan. Here are a few potential consequences:
- Late and NSF fees. If you miss a repayment or it bounces, you could have to pay a late fee or nonsufficient funds (NSF) fee.
- Lose collateral. If you have a secured line of credit, your lender can seize that collateral to cover the loss.
- Become personally responsible. If you or other business owners backed the line of credit with a personal guarantee, you’re responsible for repaying the loan if your business defaults.
- Damage your credit. If you can’t afford to repay the line of credit personally, it can damage your personal and business credit scores and make it more difficult to borrow in the future.
Can I pay off my line of credit early?
It depends on the lender and how your credit line works. Generally, the faster you repay your balance, the more you’ll save in interest. The one exception is lenders that charge flat fees instead of interest or prepayment penalties. In this case, it doesn’t matter how much time you take to pay it off, you’ll have to pay the same amount.
3 alternatives to a business line of credit
Not sure a line of credit is right for your business? Consider these alternatives instead:
- Business credit card. A credit card comes with more flexible repayments than a non-revolving line of credit and can be simpler to use on small expenses if your lender doesn’t give you a debit card to access your credit line.
- Business microloan. If you were considering a credit line because you have a one-time expense that’s too small for a term loan, a microloan can give you more competitive rates and is often easier to qualify for.
- Invoice factoring. When you’re regularly experiencing cashflow gaps due to unpaid invoices, this option allows you to sell your invoices at a discount to a factoring company. This typically comes with fewer credit requirements than a line of credit.
Business lines of credit can be ideal for projects with ongoing expenses or when you’re hit with seasonal cashflow gaps and need working capital. But they can have higher rates than term loans — and even some credit cards — and aren’t that helpful for a one-off cost.
You can learn more about your financing options by checking out our guide to business loans.
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