How does a business line of credit work?
A line of credit works similarly to a credit card. With a line of credit, you can draw funds as needed and repay them over time. You can keep reusing and repaying your line of credit as often as you’d like, as long as you make payments on time and don’t exceed your credit limit.
You pay interest only on the portion of money that you borrow, and most lenders allow you to repay your full balance early to save on interest costs.
A business line of credit differs from a term loan, which provides a one-time lump sum of cash upfront, repaid over a fixed period, or term. Line of credit borrowing limits — ranging from $1,000 to $250,000 — are usually smaller than term loans.
How to get a business line of credit
At a minimum, you’ll need at least six months in business and $25,000 in annual revenue to qualify for a business line of credit. Although not all lenders set a minimum credit score, borrowers most likely will need a score of 500 or higher to qualify.
Business lines of credit are issued by traditional lenders, like banks, as well as online lenders like OnDeck and BlueVine. Interest rates and borrowing limits can vary widely depending on the lender’s requirements and the borrower’s circumstances.
When you apply for a business line of credit, lenders typically require documentation including personal and business tax returns, bank account information and business financial statements, such as profit-and-loss statements and a balance sheet.
Most traditional lenders require businesses to have strong revenue and several years of history to qualify for a line of credit. Larger lines of credit may require collateral, which can be seized by the lender if you fail to make payments. SBA lines of credit have similarly strict requirements.
Online lenders typically have looser qualification requirements than banks. However, these lenders are also likely to charge higher rates than banks and may have lower credit limits.
After approval, lenders may be able to issue business lines of credit in a matter of days. Banks generally take longer than online lenders to set up new lines of credit.
Secured vs. unsecured business line of credit: What's the difference?
A secured business line of credit means you are putting up assets such as inventory or property as collateral. If you fail to pay back the credit line, a lender could seize your assets.
Obtaining an unsecured business credit line doesn’t require collateral, but some lenders may still require a personal guarantee or a lien on a business’ assets.
A personal guarantee gives a lender the right to go after your personal assets, such as a house, if you default on a loan. A lien is similar; a lender can seize your business assets if you haven’t repaid a loan.
When comparing lenders, ask whether they require a collateral, personal guarantee or a lien so that you can find the option that’s best for your business.
Business credit cards vs. business credit lines
Business credit cards are also lines of credit, but differ from a traditional business line of credit in several ways.
A business line of credit provides a higher credit limit, may be secured by collateral and provides actual cash to your bank account when you make a draw. You can get cash through a business credit card, but you’ll be charged fees and a higher APR to do so. Other common fees for business credit cards include annual fees and late-payment fees.
Business credit cards work best for smaller ongoing expenses and for newer businesses without established finances, while a business line of credit works best for larger ongoing expenses and more mature businesses.
Just like personal credit cards, business credit cards can provide rewards or cash back for spending. Rewards are typically related to business expenses, such as office supplies, gas, internet and cable. They may also offer 0% interest promotions, which allow you to pay no interest on your balance for a specific time period after signing up for the card.