What Is a Business Line of Credit?

A business line of credit (LOC) is a type of business loan offering a credit line up to a fixed amount. You only pay interest on what you spend from the business line (similar to how a business credit card works).

A small business line of credit provides peace of mind for small business owners by providing cash flow for needed purchases.

Read our What Is a Business Line of Credit guide to learn more.

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Business Line of Credit Options for Small Business

A business line of credit is a business loan used to cover short-term expenses. For example, you may need to take out a loan from time to time to pay property taxes or to cover payroll.

Like business credit cards, a line of credit only charges interest on the amount borrowed against the line of credit, not the credit limit. 

There are different types of small business credit lines. The main kind is an unsecured business line; secured credit lines involve a security deposit that you pay upfront, but the money is deposited into your business account.

Not all unsecured business lines are the same: The best lines of credit offer flexible financing terms and great rates from reputable lenders without a personal guarantee. We vetted many small business lenders, and here are the best lines of credit for businesses we found:

  1. Lendio: Easiest Approval, Most Transparent, Great Rates
  2. Fund Box: Quick Business Loans, Simple Application
  3. Chase: Best Line of Credit for Small Business
  4. Wells Fargo: Best Business Line of Credit for Startups
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Recommended: Get a Divvy business credit card to build business credit for your small business.

How a Small Business Line of Credit Works

A business line of credit works like a business credit card. You, the small business owner, have a credit limit, possibly pay an annual fee, and you only pay on what you actually spend from the credit limit. Interest rates are higher than a traditional loan.

Take someone who owns a restaurant that’s losing sales. If the owner doesn’t have enough money to pay employees, having a line of credit ensures they can continue meeting expenses without shutting down.

Pros

  • Access to capital when needed
  • Only pay interest on money borrowed against the line of credit.
  • Free up cash flow for greater flexibility and growth opportunities

Cons

  • Higher interest rates
  • Annual fee

Requirements for a Small Business Line of Credit

In order to be approved for a business line of credit, businesses must meet certain requirements, including having sound financial stability and having a good credit history. 

Additionally, businesses must demonstrate that they will use the funds responsibly and pay back the loan in a timely manner.

To get the best possible rate and terms on a business line of credit, businesses should research available options and speak with an experienced lender.

Benefits of a Small Business Credit Line

A small business credit line can be an important tool for helping your business grow. Here are some key benefits: 

  • Improves cash flow — Small business credit lines are a good way to improve cash flow. If your business has short-term expenses that need to be paid, a small business bank loan can help you pay them.
  • Pay only for what you use — You only pay interest on the money you actually use. If you're a small business that doesn't have a lot of cash flow, a business credit line can be a good option to improve your cash flow and allow you to pay your bills promptly.
  • Increases opportunities — If you're a small business, a business credit line can help you expand your business by giving you the money you need to grow.
  • Helps build business credit — Business credit lines can help you build your business credit rating when your financial institution reports monthly to the business credit bureaus.

A small business credit line can provide a quick infusion of cash when needed, but there are some key drawbacks to consider.

  • A business credit line carries interest rates that are typically higher than those available from other sources of financing. This may make it difficult to qualify for a loan in the first place and could lead to high monthly payments if you do obtain one.
  • A business credit line is often tied to the health of the underlying company, so if it's not used prudently, it could result in bankruptcy or foreclosure.
  • If the business fails to meet its debt obligations, creditors may seize assets or even close the company down completely. It's important to carefully weigh the benefits and risks of using a business credit line before making a decision.

How to Get a Business Line of Credit

Acquiring financing requires perseverance and planning. You have to make sure you follow the instructions of each lender accordingly and ensure that you’re prepared for getting a business LOC. Knowing the best practices and following some basic guidelines will help you prepare for applying for a LOC.

Requirements for getting a business line of credit:

  • Traditional lenders, such as banks, require strong revenue and for you to be in business for a few years.
  • Larger lines of credit could require collateral, which would be seizable if you fail to make payments.
  • Lenders require documentation: personal and business tax returns, a business bank account, and business docs like income statements, balance sheets, and cash flow statements.
  • Online business lenders are laxer but charge higher interest rates.
  • At best, you'll need to be in business for six months and be able to show $25,000 in annual revenue.
  • Having some adequate cash in your business bank account helps, as lenders want to know you can manage cash.

What Are the Types of Small Business Lines of Credit?

A business line of credit can be either a secured or unsecured loan. Secured loans require you to put up some form of collateral or guarantee to qualify for the loan. Unsecured loans do not require a guarantee or collateral.

Secured Business Line of Credit

A secured business line of credit requires the borrower to put up some form of collateral to guarantee the loan gets repaid. This makes the loan less risky for the lender, since if the loan is not repaid, the lender takes ownership of the collateral.

High-risk businesses are an example of types of businesses that would require some type of security in order to qualify for a business line of credit.

Here are some high-risk industries:

  • Ecommerce
  • Adult-oriented businesses
  • Tobacco
  • Gambling
  • Financial services
  • Legal services
  • Travel and hospitality
  • Health and wellness
  • Software

Unsecured Business Line of Credit

An unsecured business line of credit does not require the borrower to put up some form of collateral to guarantee the loan gets repaid.

Low-risk businesses are an example of types of businesses that would not require some type of security in order to qualify for a business line of credit.

Here are some low-risk industries:

  • Hairdressing
  • Tradespeople
  • Food suppliers
  • Funeral services
  • Technology

Frequently Asked Questions

How can small business owners improve cash flow with business lines?

Small business owners are always looking for ways to improve their cash flow. By utilizing a business line of credit, they can gain access to capital that can be used to finance new equipment, expand their workforce, or cover other costs associated with running their business.

What is a small business line of credit?

A small business line of credit, also known as a working capital loan, is a short-term loan that businesses can use to bridge short-term cash needs. These loans are used by businesses to cover unexpected expenses. A business line of credit terms can range from a few weeks to several months.

Where do you apply for a small business loan?

There are numerous types of business lines and small business loans (e.g., unsecured credit lines, a secured business line, working capital, etc.). There are outlets to apply for a small business loan:

  • Traditional banks
  • Small business administration
  • Online lenders
  • Credit unions (bank or credit union)

What is the purpose of a business line of credit?

A business line of credit provides businesses with an easy way to borrow money. This type of loan can be helpful for businesses in a number of ways, including:

  • Helping to finance expensive investments or expansions
  • Providing short-term relief from cash flow difficulties
  • Filling in temporary gaps in liquidity

How do you get a line of credit for an LLC?

To get a line of credit for your LLC, you'll need a good credit score and will need to provide information about your company, including revenue and expenses, assets and liabilities, and whatever other paperwork your lender requires.

How hard is it to get a small business line of credit?

Getting a small business line of credit can be difficult. It is best to have a low debt-to-income ratio and a low debt-to-capitalization ratio, and a good business credit score.

What is the minimum credit score for a line of credit?

The minimum credit score is different for each lender. For this reason, you’ll need to check with the lender you’re requesting a business line of credit from to determine if you meet their qualifications. The higher your business credit score, the more likely you are to be approved.

How long does it take to get approved for a business line of credit?

It takes approximately three weeks to be approved for a business line of credit. The lender has to verify your financial information, check your business credit score, and determine what your credit limit should be. Some lenders may take less or more time, depending on their lending criteria.

What's the difference between a business credit card and a business line of credit?

A business credit card allows businesses to borrow money up to a certain limit in order to purchase items or incur expenses. The interest rates on business credit cards are typically higher than those on business lines of credit, but they come with additional benefits like no annual fees, flexible borrowing limits, and extended loan terms. 

Business lines of credit are types of small business loans that provide a longer-term solution for businesses. Interest rates on business lines of credit are typically lower than those on business credit cards, but they come with more restrictions, such as requiring pre-approval and an annual percentage rate (APR) that must be approved by the lender.

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