Small Business Line of Credit
A revolving line of credit provides a flexible option for business capital, giving you access to funds when you need them without having to pay for what you don’t use.
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What is a Small Business Line of Credit?
A business line of credit is a flexible business loan that allows you to borrow up to a certain amount, or credit limit, to cover short-term working capital requirements. When you get a business line of credit, the lender approves you to borrow up to a certain amount of money and you’re able to access some or all of that money as you need it. After you fully pay off a portion you’ve used, the full amount of your line of credit is available for you to use again.
Although business lines of credit do operate very similarly to a credit card, they are not the same thing. Credit cards typically have higher interest rates and in many cases, a line of credit does not have a mandatory monthly payment system.
How Does a Line of Credit for Small Business Work?
Unlike a term loan, a business line of credit allows you to only pay interest on the amount you actually use. For example, if a business owner has a credit limit of $150,000 but only uses $40,000, they only have to pay interest on the $40,000 draw. Once the amount has been repaid ($40,000), the business owner can draw additional funds up to the amount of their credit limit ($150,000).
Types of Small Business Loans Line of Credit
There are several different types of business lines of credit. Just like a regular business loan, a business line of credit can be either secured or unsecured. A secured business line of credit requires the borrower to put up an asset to be used as collateral while an unsecured line of credit doesn’t. Since an unsecured line of credit involves a higher risk on the part of the lender, the borrower needs to have a higher business credit score to be approved for one.
Business lines of credit also come in different term lengths: short term and medium term. Unlike with loans, term lengths have nothing to do with how long you have to make payments on it or how long it’s available to you. Instead, the different terms indicate things like interest rates and spending limits. For example, a short-term line of credit has higher interest rates, lower limits, and lower revenue requirements, similar to short-term loans. Conversely, medium-term lines of credit have lower interest rates and higher borrowing limits, much like a medium-term loan does.
Credibly provides access to both secured and unsecured business lines of credit with a maximum credit limit of $300,000.
Line of Credit vs. Term Loan
The main difference between a term loan and a line of credit is how you receive the money and the repayment terms. Term loans provide a specific sum of money that is repaid over a fixed period of time, otherwise known as the loan term. Lines of credit, on the other hand, provide a revolving account that allows borrowers to draw up to a certain loan amount, repay the amount borrowed, and redraw up to the amount of the credit limit to receive additional funds. Unlike keeping up with the fixed payments of a term loan, you will be required to pay interest on borrowed balance while the credit line remains open. In many cases line of credit, borrowers are required to meet a minimum monthly payment to avoid additional fees or penalties. Some lines of credit are open-ended; the line does not close after a certain period of time as it does with a term loan. Others may close or become inactive after a certain amount of time or period of inactivity.
Is a Line of Credit Right for My Business?
As a business owner, there are often times when working capital is tight. Without ample liquidity to cover business expenses like payroll, inventory, rent, and utilities it can be difficult to maintain operations. As one of the most flexible financing options, lines of credit are great for ensuring that you have the necessary working capital to meet your business needs and have access to emergency funds if needed.
For many businesses, a line of credit is the go-to solution for stabilizing cash flows as borrowers can secure access to funds and then draw at a later time when additional working capital is needed. It’s also a great option for those who need to remain adaptable. After all, small business owners often have a limited window of time to seize the opportunity when it arises. A line of credit allows you to quickly access the funding you need to pursue the initiative.
Because you only pay for what you use, lines of credit are also great emergency funds. That said, a line of credit would not be the right option in certain scenarios, such as trying to open a startup. This is because the total cost of capital is typically lower with a term loan.
How to Get a Small Business Line of Credit
Line Of Credit Application Details
Minimum Qualifying Criteria
Business lines of credit are available to businesses throughout the U.S. which meet certain criteria:
- 650+ personal credit score
- 6+ months in business – located in the United States
- $240,000+ in annual revenue
Required Documentation
Much like any other type of business funding, a lender will want to see proof that your business has been doing well or turning a profit. You may be asked to provide things such as:
- Basic details about you and your business
- Unexpired government-issued picture ID of all owners
- Bank or financial statements from business checking account/accounts receivable—most recent 3 months*
- For loans over $100,000, we require your most recent business tax return
Lenders who offer business lines of credit will also want to know that you would only be using it for purposes that would help your business grow, not for things like paying off past losses.
Interest Rates and Fees
Credibly aims to make both funding and payments intuitive, convenient, and easy to handle. Interest rates and funding amounts are based on a review of your business, personal FICO score, and other factors. An origination fee may be required.
Line of Credit for New Small Business: Advantages and Disadvantages
While the flexibility and revolving nature of a line of credit make it a great fit for certain circumstances, it may not be the perfect financing fit for every need.
Pros
- Only pay interest on the amount you borrow and use, rather than the amount you qualify for
- Lines of credit are flexible as long as you stay within your credit limit, making them an ideal solution for stabilizing cash flows
- Build business credit
Cons
- It can be difficult to increase your credit limit, meaning that lines of credit may not be the best solution for growing companies looking to continuously finance new initiatives
- Lines of credit often have lower borrowing limits and fees and additional charges can add up if used incorrectly
- Business lines of credit can be more difficult to qualify for than other financing options
FAQs About Business Line of Credit Requirements
Is a line of credit loan for small business considered income?
The cash received from your line of credit is not income. While it is a fast business loan, you are borrowing the money and paying interest on the amount borrowed.
What are the uses for a small business line of credit for startups?
Unforeseen expenses can happen to any business and a business line of credit can give you the peace of mind of knowing you’ll have an extra source of funding ready anytime you need it. A business line of credit can be used for a wide variety of purposes, including buying equipment, emergency repairs, renovating a storefront, purchasing inventory, and paying employees.
Business lines of credit can be particularly helpful for businesses that need some level of flexibility. They can be great for businesses in industries that face seasonal fluctuations and may occasionally need extra money to stock up on inventory or hire extra employees ahead of a busy time of year. If you’re planning a series of projects that would require extra funding now and then, you might like the flexibility a line of credit can offer.
Borrowers may not use their business line of credit for personal use. A financial penalty may result in the event that your lender finds you using your business line of credit to cover personal expenses.
Can you use a line of credit for small business owners for personal use?
No. Borrowers may not use their business line of credit for personal use. A financial penalty may result in the event that your lender finds you using your business line of credit to cover personal expenses.
Does opening a small business loan line of credit hurt your credit score?
Opening a new business line of credit may lower your credit score in the short term if the lender makes a hard inquiry on your credit. While this may cause your credit score to drop a few points temporarily, repaying your line of credit in a timely manner can actually help you build your credit.
Uses for a Business Line of Credit
Unforeseen expenses can happen to any business and a business line of credit can give you the peace of mind of knowing you’ll have an extra source of funding ready anytime you need it. A business line of credit can be used for a wide variety of purposes, including buying equipment, emergency repairs, renovating a storefront, purchasing inventory, and paying employees.
Business lines of credit can be particularly helpful for businesses that need some level of flexibility. They can be great for businesses in industries that face seasonal fluctuations and may occasionally need extra money to stock up on inventory or hire extra employees ahead of a busy time of year. If you’re planning a series of projects that would require extra funding now and then, you might like the flexibility a line of credit can offer.
What Are the Main Types of the Best Line of Credit for Small Business
Although there is really only two business line of credit categories – secured and unsecured – there are a few different options within them.
Different Types of Business Line of Credit for Small Business
#1: Traditional Secured Business Line of Credit
Secured business lines of credit rely on collateral. That is, you would put up something of value, such as business assets or real estate, as a guarantee. This guarantee means that the lending institution knows that if you default on repayment, they can claim your collateral to repay what you owe.
A secured line of credit may have better overall terms because the risk is lower. The interest rate might also be lower, repayment terms more flexible, and you may also qualify for a higher line of credit.
#2: Traditional Unsecured Business Line of Credit
Unsecured lines of credit don’t need collateral, so you won’t have to tie up any of your assets. You might also have a quicker approval time. Interest rates are often higher than secured lines of credit, and there might also be a maintenance fee that applies monthly or annually.
The SBA suggests that unsecured lines of credit might be better products than secured. They rely more on creditworthiness than years in operation, and the application process is often much less of a hassle.
#3: Real Estate Line of Credit
If you’re in real estate or want to be, there’s another product for you to think about. A real estate line of credit is similar to a personal HELOC or home equity line of credit, which is a loan that’s based on how much equity you have in a piece of real estate.
For business purposes, you can use the equity in your own home or the equity in other properties that you own to secure the loan. But there’s another option.
Real estate lines of credit come in two forms – secured and unsecured. For an unsecured real estate line of credit, the SBA explains that your FICO score is the determining factor. This allows you to buy and flip houses, staying active in the market instead of having to wait until one property sells to buy the next.
#4: Business Credit Card
Another unsecured option that the SBA recommends is the business credit card. A line of credit is already nearly identical to a credit card, but this choice has a few other perks. The main benefit is that with a credit card, nothing that you own, either for the business or personally, is tied up.
You also get quick access to cash, which is great when a line of credit might take days to transfer funds. Your payment terms are flexible too, compared to lines of credit that have set monthly payment amounts.
How to Apply for a Small Business Line of Credit
Much like any other type of business funding, a lender will want to see proof that your business has been doing well and is capable of turning a profit. You may be asked to provide things such as:
- Past bank statements and business tax returns
- Your resumé and resumés for any business partners or other essential employees
- Business plan and your business history
- Revenue projections
- Avoided business check
- A copy of your driver’s license
- P&L statements
Lenders who offer business lines of credit will also want to know that you would only be using it for purposes that would help your business grow and continue to turn a profit, not for things like paying off past losses.
Other Financing Options
Working capital loan
Always have enough cash flow to seize opportunity.
Long Term Loan
Long-term loans to help your business grow and expand
Merchant Cash Advance
Flexible financing and repayment based on what you can afford
See All Financing Options
Still looking for the right fit? Check out all of Credibly’s business financing options.
Simple Ways to Get Started
When you’re running low on cash and need to support your operations, access to fast, flexible business financing is crucial. To get started, fill out our online prequalification form or call us at (888) 991-3954.
*Bank statements must be from the business banking account for the business receiving funds.
**The rate is a simple interest rate calculated from total repayments over 26 weeks.
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Certain products may not be available in all states.
Certain business loan products are made available through Retail Capital LLC, a licensed California Finance Lender.
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