Business lines of credit can be a great option for businesses looking for a flexible loan. This type of financing is popular among small businesses as an additional source of cash to pay business expenses or use for other purposes.
A revolving business line of credit from a lender helps your company meet its short-term cash flow payment obligations. Generally, you don’t need to specify the business purpose of the loan.
What is a Business Line of Credit?
A business line of credit is lender financing with a credit limit covering gaps in short-term cash flow. Borrowers use a LOC to draw funds to make payments for business purchases, payroll, or other unspecified needs. When the business repays line of credit amounts, balance availability increases by the repaid principal amount. Companies pay interest on the part of the credit line used.
How Does a Business Line of Credit Work?
A business line of credit works by providing cash that’s borrowed only when needed. The line of credit may be linked to your business checking account, a credit card, or a mobile app. Your business pays back the principal and will pay interest only on the amounts borrowed within the approved credit limit. Repayments, excluding interest expense, increase line of credit availability.
A business line of credit may be either a revolving or non-revolving form of financing.
In contrast to a business loan, a company doesn’t receive the full amount borrowed upfront as a lump sum, with scheduled monthly principal and interest payments. Instead, the company draws down its line of credit balance when business needs arise. Business loans may be approved for larger amounts and have a specific purpose, like an equipment loan.
A line of credit works well for seasonal and cyclical businesses and bridges the time gap between paying for inventory and collecting accounts receivable from sales.
Small Business Financing Statistics
According to the Federal Reserve Banks’ Small Business Credit Survey: 2021 Report on Employer Firms, 44% of employer firms had business debt of more than $100 thousand when surveyed in 2020, and 52% of applicants sought over $100 thousand in financing. The same Fed report reported that 79% of employer firms owed debt. The percentage of applicants seeking a loan or line of credit was 89%, and 21% wanted a business credit card (with some applicants seeking multiple types of financing approval).
Business Line of Credit vs. Business Loan vs. Business Credit Card
The following table compares the financing options of a business line of credit, business loan, and business credit card.
|Business Line of Credit||Business Loan||Business Credit Card|
|Draw down funds within credit limit only when needed and repay when the business has adequate cash||✔|
|Entire lump sum borrowed is received upfront||✔|
|Possible prepayment penalty||✔|
|Pay interest and principal on only the amount borrowed for periods of time||✔|
|Pay interest and principal on the total amount borrowed||✔|
|Scheduled payment dates||✔||✔|
|Possible annual fees and one-time fees or costs||✔||✔||✔|
|High interest rate (APR) and late fees||✔|
|Grace period for payment||✔|
|Spend management tracked by user||✔|
With a business line of credit, the company draws down its line of credit balance when business needs arise, and it repays or reduces the balance at any time with excess cash to replenish the credit limit. The line of credit is usually for unspecified use. Still, certain business lines of credit specify qualified items to purchase, such as direct labor and material procured in builder contracts.
In a business loan, a company receives the full amount borrowed upfront as a lump sum, with scheduled monthly payments of principal and interest on the total loan amount. Business loans may be approved for larger amounts and may have a specific purpose like an equipment loan.
Business credit cards don’t have a specific purpose and can be used for most business expenditures. Business credit card providers usually produce spend management reports by each designated card user.
The business credit card is usually branded but issued by a bank participating in a credit card network. Major credit card networks include MasterCard, Visa, Discover, and American Express.
Business credit cards have a higher interest rate (APR – annual percentage rate) than business lines of credit and typical business loans. Business credit cards are backed by lines of credit from the issuing financial institution. Repayment terms may be net 30, net 55, net 60, or as stated by the issuer in the card agreement. Credit cards have late payment fees, but they offer a grace period until the payment is due.
A business may need to pay an annual fee on its business line of credit to cover a lender’s line of credit periodic collateral review costs and maintenance fees.
The Small Business Administration charges annual service fees and upfront guaranty fees on SBA 7(a) loans. Lenders may also charge a one-time packaging fee on these SBA loans. The SBA doesn’t allow 7(a) loan lenders to receive an origination fee.
Business credit cards may also charge an annual fee.
Best Options for Business Lines of Credit in 2023
Small businesses can choose to get a business line of credit from a large or small bank, credit union, or an alternative lender. Banks and credit unions may charge lower interest rates. Compare terms, interest rates, credit limits, any security needed as collateral, and personal guarantees required, from several lenders under consideration.
Besides banks and credit unions, consider whether these or other alternative, online, and Fintech lenders can meet your specific business needs with reasonable terms:
- OnDeck is an alternative online lender providing business lines of credit (LOC) for quickly approved companies. Minimum qualifications include being in business for at least one year, with a business annual gross revenue of at least $100 thousand. The credit approval may be based on an owner’s personal credit score. OnDeck works for businesses that haven’t established good business credit. Check the OnDeck website for restricted industries and states where their LOCs aren’t offered.
- Fundbox is an online alternative lender for a revolving line of credit used by small businesses for working capital and term loans. The maximum Fundbox loan available is $150 thousand. Fundbox quickly approves loans.
- Bluevine is an online Fintech (financial technology) company that offers incorporated U.S. small businesses a business line of credit. For approved companies, the business LOC credit limit is up to $250 thousand after only six months in business if they generate at least $10 thousand per month in business revenue. This business line of credit is good for new businesses just past startup, although Bluevine also provides lines of credit for larger established companies.
- American Express (formerly Kabbage) is an online lender requiring good credit history for its unsecured small business line of credit applicants. But this American Express company also issues secured lines of credit for companies with less established or non-qualifying business credit. The approval amount from the quick application process determines the credit limit for the business line of credit.
Besides looking at business or personal credit reports, some lenders like banks may request financial statements and tax returns for a business line of credit approval. Business lines of credit may be secured by business assets or personal assets of the owner.
Secured vs. Unsecured Business Lines of Credit
Business lines of credit are generally unsecured up to a specified amount like $100,000 or secured with collateral for a larger approved LOC credit limit. Unsecured lenders may charge higher interest rates to compensate them for higher risk and require a personal guarantee from the small business owner. And lenders may require security. The business LOC lender will consider years in business.
Where to Get a Business Line of Credit
You can get a business line of credit from your bank, a different financial institution like a credit union, or an online or alternative lender that may be a Fintech.
The Federal Reserve Banks’ 2021 Small Business Credit Survey shows that employer firms in the U.S. seek financing from financial institutions and alternative sources, as follows:
- Large bank: 49%
- Small bank: 45%
- Financial services company: 23%
- Credit union: 12%
- Online lender/Fintech company: 11%
- Finance company: 8%
- Alternative financial source: 3%
- CDFI (Community Development Financial Institution): 2%
- Other: 6%
Business Lines of Credit Example
For example, U.S. Bank National Association (member FDIC) offers several types of business lines of credit, as described on its website.
U.S. Bank’s business line of credit offerings include:
- Cash Flow Manager
- Up to $250,000
- Business Equity Line of Credit
- Uses real estate equity as security
- Up to $500,000
- Business Line of Credit
- Up to $1,000,000
- For purchasing equipment, inventory, or materials
- Business Reserve Line
- Overdraft charge protection up to $5,000
How to Get a Business Line of Credit
To get a business line of credit, your business must apply to banks or alternative lenders and meet the qualifications. Qualifications include two or more specified years in business and other lender-specific requirements.
7 steps to get a business line of credit (LOC) include:
- Research potential business line of credit lenders online.
- Read online or ask about specific requirements for each lender before applying.
- Meet with your bank’s loan officer to discuss getting a line of credit for your small business.
- Complete LOC applications for which your business qualifies.
- Submit any documents the lender requires.
- Compare results and choose a business line of credit lender.
- Provide your business bank account details when requested by the lender.
Is it hard to get a business line of credit?
Yes, getting a business line of credit may be hard for a startup or company without the minimum required years of business operation and revenues or collateral. The business borrower should have a good credit history. A personal guarantee may be required for an unsecured line of credit for a small business.
Is there a Preferred Lender for getting one?
SBA Preferred Lenders are SBA-approved and operate under the SBA 7(a) loan program, which includes different types of small business loans and business lines of credit through the Small Business Administration (SBA) CAPLines. SBA Preferred Lenders have “more authority to process, close, service, and liquidate SBA-guaranteed loans,” per the SBA.
What are the 4 types of SBA CAPLines?
The 4 types of SBA CAPLines are shown in the following table:
|SBA CAPLine Type||Purpose||Revolving LOC?||Personal Guarantee?||Maximum Maturity|
|Seasonal CAPLine||Finances seasonal increases in accounts receivable and inventory, including related increases in labor costs||Revolving or non-revolving||Yes, by 20%+ owner(s)||10 years|
|Contract CAPLine||On assignable contracts, finances direct labor and material costs||Revolving or non-revolving||Yes, by 20%+ owner(s)||10 years|
|Builders CAPLine||Financing of direct labor and material costs for a small general contractor or builder constructing or renovating commercial or residential buildings||Revolving or non-revolving||Yes, by 20%+ owner(s)||5 years|
|Working CAPLine||Collateralized, asset-based financing for businesses that can’t meet standards for long-term financing; used for cyclical growth, recurring, and short-term business needs. Lenders may charge fees to service the loan and monitor collateral.||Revolving||Yes, by 20%+ owner(s)||10 years|
Source: SBA CAPLines
When should you consider one?
Your business should consider a line of credit when it needs short-term cash not generated internally in time to make payments for operating expenses, inventory, or other business purposes. A line of credit works well for seasonal and cyclical businesses. A business line of credit bridges the time gap between paying for inventory and labor costs and collecting accounts receivable from sales.
Besides being used for general business purposes and working capital management, a qualified business can use a specialized SBA line of credit for small businesses to finance business contracts and builder construction contract costs for direct labor and material.
Your business needs enough years in business, sufficient annual revenue, and a good credit score to qualify for a business line of credit without using your personal credit score or needing a personal guarantee.
Consider using a business line of credit when you need to optimize cash flow management and working capital liquidity.