Business Line of Credit: How It Works and Best Options 2021

How does a business line of credit work?

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.

With a line of credit, you can keep reusing and repaying it as often as you’d like, as long as you make payments on time and don’t exceed your credit limit. Most lenders allow you to repay your full balance early to save on interest costs.

Line of credit borrowing limits — ranging from $1,000 to $250,000 — are smaller than a term loan.

Business lines of credit with lower credit limits are typically unsecured, which means collateral such as real estate or inventory is not required.

How do I qualify for a business line of credit?

Most traditional lenders, such as banks, require businesses to have strong revenue and at least a few 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.

To apply, lenders typically require the following documentation: personal and business tax returns, bank account information and business financial statements, such as profit-and-loss statements and a balance sheet.

Online business lenders typically have looser qualifications than banks. However, these lenders are also likely to charge higher rates than banks and may have lower credit limits.

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 some lenders don’t set a minimum credit score, borrowers most likely will need a score of 500 or higher to qualify.

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.