What Is a Small Business Line of Credit?

A line of credit (LOC) is a short-term financing option offered by lenders, giving businesses access to capital on demand. These loans have higher interest rates than traditional term loans, but you only pay interest on the money you borrow against your credit line. Businesses affected by seasonal slowdowns and unsteady economics benefit most from a business line of credit. For example, an auto dealership’s worst sales months are January and February, meaning they have less operating capital to cover everyday costs. A dealership would use a business line of credit to keep afloat during these slow periods.


How Does a Business Line of Credit Work?

A business line of credit works like a credit card. You 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 losing sales from the COVID-19 pandemic. Pretend the owner doesn’t have enough money to pay employees. Having a line of credit ensures she or he 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 to

Cons

  • Higher interest rates
  • Annual fee

Business Line of Credit vs. Business Credit Card

A business line of credit is used to pay for any business expense, like having available cash in a business checking account.

A business credit card is used to make purchases and pay for services but only if that card is accepted by the merchant.

Differences between line of credit and a credit card:

  • Credit cards offer perks and other rewards.
  • Credit cards protect you against loss or damage.
  • Credit cards charge higher interest rates and annual percentage rates (APR)
  • Not all establishments accept credit cards.
  • Some establishments only accept credit cards.
  • Credit card cash advances charge additional fees and interest.
  • Lines of credit charge a flat fee regardless of how the money is spent.

Business Line of Credit vs. Business Term Loan

A business line of credit is used like a credit card to pay for business expenses in cases where you might not have, or want to use, cash to pay. You pay interest on what you spend.

A business term loan is a set amount of money you borrow and repay in full over time. You pay interest on the full amount of the loan over the lifetime (term) of the loan.

Differences between line of credit and a term loan:

  • Line of credit used as needed
  • Line of credit higher interest rate
  • Line of credit daily APR calculated interest rate.
  • Term loans have fixed monthly payments.
  • Term loans have lower interest rates.
  • Term loans are usually purchased for a specific purpose.

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

What Are Small Business Lines of Credit Used For?

Use a small business line of credit to pay vendors and other bills on time, when your business is experiencing a cash flow shortage. There are other reasons a business may want to use a business line of credit.

Reasons to use a business line of credit:

  • Protect cash flow
  • Short-term ongoing expenditures
  • Cash flow gaps
  • Make timely payments
  • Build business credit
  • Track certain expenses, like payroll

When to Get a Business LOC

The best time to acquire any loan is before you need it. Traditional bank loans can take weeks, if not months, to qualify for loans and access funds. The ideal time to get a small business line of credit is before you anticipate a slowdown in sales. This way you have the credit line to protect your cash flow when things do slow down, such as after the holiday shopping season.

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, 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 more lax but charge higher interest rates.
  • At a best, you'll need to be in business for six months and be able to show $25,000 in annual revenue.
  • Have some adequate cash in your business bank account, it helps, as lenders want to know you can manage cash.

How to Keep Your Business LOC

To keep your business line of credit, you must renew every year. You’ll be charged a renewal fee and have to fill out some paperwork. You may qualify for a lower interest rate, so be sure and ask. It doesn’t hurt to ask.

Best Small Business Lines of Credit

There are many lenders selling business lines of credit. Knowing the best one requires some digging. Not to worry though, we did the research for you. We came up with the best small business lines of credit.

Wells Fargo Business Line of Credit

Wells Fargo offers the best business line of credit for businesses looking for a traditional lender they can rely on. Wells Fargo is the largest bank in the US and processes the most SBA loans of any bank. You can confidently believe they know what they’re doing.

Advantages:

  • $0 annual fee for the first year
  • $5,000 to $100,000 revolving credit line
  • Rates as low as Prime + 1.75%
  • No collateral required
  • Automatic enrollment in a free rewards program

Disadvantages:

  • Must apply at the bank
  • Lengthy application process
  • Rates vary business-to-business

How to Apply for Wells Fargo Business Line of Credit:

  1. Know why you want the loan.
  2. Make sure you have your business documents, including bank statements, balance sheet, income statement, tax statements, government-issued ID, tax number, and social security number.
  3. Visit a local branch and speak with a business loan officer.
  4. Complete the necessary paperwork.
  5. Wait to be approved, could be weeks.
  6. Once approved, you will have access to the credit line.

Fundbox

Fundbox offers the best business line of credit for businesses looking for a low rate and quick approval. Fundbox is an online lender that can approve you in a couple of minutes.

Advantages:

  • Funds available on demand
  • Only pay for what you use
  • Access to a revolving line
  • Auto debit from you bank account
  • No early repayment penalty
  • See fees upfront

Disadvantages:

  • Not a long term solution, repayment plans extend to 24 weeks max
  • No early payment incentive
  • Interest paid first, before principle
  • Weekly repayment scheme, not monthly

How to Apply for a Fundbox Business Line of Credit:

  1. Make sure you have your business documents, including bank statements, balance sheet, income statement, tax statements, government-issued ID, tax number, and social security number.
  2. Visit Fundbox.com and fill out an online application.
  3. Complete the necessary paperwork.
  4. Wait for a quick approval decision, usually the same day.
  5. Once approved, you will have access to the credit line.

OnDeck

OnDeck offers the best small business line of credit for businesses looking for a revolving line of credit up to $50,000 with a company that values loyalty. OnDeck has same-day approval for most businesses that apply through them. With OnDeck, you can get an unsecured LOC, meaning you need collateral to guarantee the loan. Many customers remain loyal OnDeck customers, and OnDeck rewards them for this loyalty with better rates moving forward.

Advantages:

  • Money can be used for most business expenses
  • Free up your cash
  • Transparent fees
  • Easy approval
  • Don’t need collateral.
  • Help you build business credit
  • Tailored loans
  • Loyalty benefits

Disadvantages:

  • Need 700+ Experian score to qualify for a line of credit
  • Need established business credit to qualify
  • Higher interest rates compared to other lenders.

How to Apply for a OnDeck Business Line of Credit:

  1. Make sure you have your business documents, including bank statements, balance sheet, income statement, tax statements, government-issued ID, tax number, and social security number.
  2. Visit OnDeck.com and fill out an online application.
  3. Complete the necessary paperwork.
  4. Wait for a quick approval decision, usually the same day.
  5. Once approved, you will have access to the line of credit.

BlueVine

BlueVine offers the best small business line of credit for businesses with low credit scores looking for a high-limit revolving line of credit up to $250,000. With BlueVine, you can get approved in five minutes. Once you have access to the funds, you can use it like cash and purchase whatever you need.

Advantages:

  • Only requires 650 FICO credit score
  • Larger credit limits
  • Free up your cash
  • Only fund what you want
  • Transparent fees
  • Easy approval
  • Funds available on demand
  • Access to a revolving line of credit
  • Pay for only what you use
  • Financing that grows with your business

Disadvantages:

  • Need to be in business three years to qualify for a line of credit
  • Need $40,000 in monthly revenue to qualify for a line of credit

How To Apply for a BlueVine Business Line of Credit:

  1. Make sure you have your business documents, including bank statements, balance sheet, income statement, tax statements, government-issued ID, tax number, and social security number.
  2. Visit Bluevine.com and fill out an online application.
  3. Complete the necessary paperwork.
  4. Wait for a quick approval decision, usually the same day.
  5. Access to the small business LOC.

Conclusion

A small business line of credit is like having cash in your bank account. The only difference is that you have to repay this monthly, along with interest, as you spend it. The benefit of having a line of credit is that it protects the cash in your business checking account when funds start to dwindle due to slowed sales. This gives you the protection of added liquidity to continue paying payroll, vendors, and maintaining inventory levels.

Unlike a traditional term loan where you’re guaranteed to pay so much in interest, a line of credit only requires you to pay interest on the money you actually spend. This makes a small business line of credit a valuable asset to most small businesses operating on slim margins.

FAQ

What is a business line of credit and how does it work?

A business line of credit works a lot like a business credit card. The primary difference is lower interest rates, and the money sits in a bank account like cash. As you need the money, you spend it and pay interest only on what you spend.

Interest on a business line of credit is most often calculated the same as how it is calculated on a business credit card, through a daily periodic rate table.

How to calculate interest on a business line of credit?

To calculate the daily interest on a business line of credit (or business credit card) take the APR, divide it by 365 days, and multiply that by your current balance.

For example, if your APR is 9.99%, dividing this by 365 days gets you a daily periodic rate (DPR) of .027369. If the balance on your LOC is $547.95, you simply multiply $547.95 by .027369 and your calculator will give you 14.9968. Since APR is a “percentage,” you will move your decimal two places to the left, and your daily interest becomes .149968 cents, rounded to .15 cents. This money gets calculated each day and added the following day, so at the end of the month, you’re responsible for paying the total accumulation of this interest.

How do I get a line of credit for my business?

There are certain steps one should take to get a business line of credit. Here are some basic guidelines to help you acquire a LOC:

  1. Know why you want the loan.
  2. Make sure you have your business documents, including bank statements, balance sheet, income statement, tax statements, government issued ID, tax number, and social security number.
  3. Visit a local bank branch and speak with a business loan officer, or choose an online lender and fill out a digital application.
  4. Complete the necessary paperwork required by the lender.
  5. Wait to be approved, could be the same day or even months.
  6. Once approved, you will have access to the credit line.

Is a business line of credit a good idea?

Since most small businesses run into cash flow problems, having a line of credit to protect your cash and keep your business running smoothly makes sense. 80% of small businesses fold because of cash flow problems.

How much of a business line of credit can I get?

How much credit your business qualifies for depends on the lender, your business’s creditworthiness, your business’s financials, and other economic factors. The best answer is to tell you to maintain your business credit, work hard to generate profits and cash flow for your business, and ensure that you apply for a business line of credit well before you need it. This way you help your business credit, so you can later ask for a higher line of credit.

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