Find the Lowest Rates on Business Lines of Credit

What is a Business Line of Credit?

By Meredith Wood, Editor-in-Chief

Last Updated: July 11, 2019

A business line of credit gives access to a pool of funds to draw from when you need capital. Unlike a traditional business loan, you have the flexibility to borrow up to a set amount (typically anywhere from $50,000 to $500,000), repaying only the amount you withdraw, with interest. Draw on your small business line of credit to handle cash flow gaps, get more working capital, or address almost any other emergency or opportunity.

Maximum Loan Amount
$10K to over $1M
Loan Term
6 months to 5 years
Interest Rates
7% - 25%
Speed
As fast as 1 day
Pros
  • Only pay interest on funds drawn
  • Capital is available when needed
  • Suitable for a wide range of business purposes
  • Bad credit is acceptable
  • Excellent way to build your credit score
Cons
  • Might need to provide updated documents upon each draw
  • May require collateral
  • Higher rates for lower credit scores
Compared to other loan types
Loan types Max amount Interest rate Speed
Business Line of Credit $10K to over $1M 7% - 25% As fast as 1 day
SBA Loan $5K - $5M Starting at 7.75% As fast as 2 weeks
Business Term Loan $25K to $500K 7 - 30% As fast as 2 days
Invoice Financing Up to 100% of invoice value Approx. 3% + %/wk outstanding As little as 1 day
Startup Business Loan $150K 7.9 - 19.9% As fast as 2 weeks
Equipment Financing Up to 100% of equipment value 8 - 30% As fast as 2 days
Short-Term Business Loan $2.5K - $250K Starting at 10% As fast as 1 day
Merchant Cash Advance $2.5K - $250K 1.14 - 1.18 As little as 2 days
Personal Loan for Business $35K 5.99 - 35% APR As fast as 1 day

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Who Qualifies for Business Lines of Credit?

What sorts of businesses are eligible for this flexible financing?

Younger, less established businesses might be able to qualify for short-term lines of credit, while medium-term lines of credit are more for businesses with good credit and a solid financial history.

The maximum amount of funding available, introductory duration of the credit line, and repayment terms depend on your business’s revenues, credit rating, history, and other factors.

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Most customers who were approved had

**Based on past Fundera customers

Annual Revenue
Over $180K
Credit Score
630
Time in Business
Over 1 year

How Do You Apply for a Business Line of Credit?

A business line of credit application can be a very easy process, depending on the line of credit lender you’re working with. Online business line of credit providers will have quick, streamlined applications, thanks to the use of technology in their underwriting processes. On the other hand, traditional banks will have more intensive business line of credit applications.

Generally speaking, online business line of credit providers offers smaller, shorter-term options that will come with an easy and fast application process. Meanwhile, banks will offer larger and longer-term options might require more paperwork and could take slightly longer to fund.

Documents you need:
  • Driver's License
  • Voided Business Check
  • Bank Statements
  • Balance Sheet
  • Profit & Loss Statements
  • Credit Score
  • Business Tax Returns
  • Personal Tax Returns

How Does a Small Business Line of Credit Work?

Surprises happen—it’s a fact of life.

But how can you expect the unexpected when it comes to your business? A single accident could set you back a long way if you’re not prepared.

That’s why flexible business financing is so important.

And Fundera helps thousands of small business owners get that flexible funding in the form of a business line of credit.

Here’s what you need to know about a small business line of credit—and how it can help you weather storms and take advantage of unforeseen opportunities

Business Lines of Credit: The Fundamentals

What exactly is a business line of credit?

Simply put, a small business line of credit is pretty similar to a personal line of credit (like your credit card).

A bank or lender gives you access to a specific amount of financing set by a credit limit, which you can draw from whenever you want or need.

However, you don’t make payments or incur any interest until you actually tap into those funds. You pay for what you use, in other words.

Business lines of credit can come secured—backed by collateral like inventory, accounts receivable, and so on—or unsecured, backed only by your personal guarantee.

An Example of “Revolving” Business Lines of Credit

This sort of financing often gets referred to as “revolving” credit because you can tap into it again and again… And when you repay what you’ve spent, you can continue to draw capital from your line of credit.

For instance, say you’re given access to a $60K small business line of credit.

Next, you decide to take out $40K, keeping the other $20K in the pool of available funds.

Once you pay that $40K back (plus interest), you’ll have the whole $60K at your fingertips again—without having to apply for another loan.

The time and energy you save is one of the biggest benefits to a business line of credit.

While most business lines of credit are traditional revolving credit products, some will not automatically renew after you’ve fully repaid what you owe. Some non-revolving lenders will have you reapply to renew your line of credit. Assuming you’ve remained in good graces with your lender, reapplying should be an easy process.

Business Lines of Credit vs. Traditional Term Loans: How They Differ

So what sets a business line of credit apart from a traditional term loan?

To start with, business lines of credit usually come with lower interest rates and closing costs than traditional term loans of similar sizes.

But on the other hand, if you’re late with a payment or go over your credit limit, that interest rate could spike pretty high.

Also, traditional term loans have regular interest rates over the life of the loan, which is a major difference between term loans and business lines of credit.

If you’re comparing a small business line of credit with a traditional term loan, keep in mind that lines of credit tend to work better for repeated cash flow issues while term loans often make more sense when it comes to specific purchases or one-off business investments. But that doesn’t mean you can’t or shouldn’t use a business line of credit for business purchases, too.

Different Kinds of Business Lines of Credit

Though it’s not an industry standard, we split business lines of credit up into short-term and medium-term.

Why?

Although small business lines of credit don’t really have term lengths—you can withdraw and pay back those funds indefinitely, as long as your lender believes that you’re a responsible borrower—these labels help you compare short-term loans with short-term lines of credit and traditional term (or “medium-term”) loans with medium-term lines of credit.

The differences are mostly in their minimum qualifications, maximum fund amounts, and interest rates.

The longest-term lines of credit typically come from a traditional bank. Medium-term lines of credit and short-term lines of credit are typically found with online lenders.

The Benefits of a Business Line of Credit

The biggest advantage of a business line of credit is its renewability: you can draw out funds, pay them back, and draw again.

You can use a small business line of credit to help finance ongoing operating expenses, cover cash flow gaps, take advantage of unexpected opportunities, and provide a cushion to protect against emergencies.

Since lines of credit are so flexible, they can also be used for payroll, seasonal expenses, and unforeseen problems or investments, as well as larger purchases.

This flexibility is what makes a business line of credit such a valuable loan product for small business owners.

Business Line of Credit vs. Credit Card: What’s the Difference?

Although business lines of credit and business credit cards are both forms of “revolving” credit, there are a few important differences you should be aware of:

  • Credit cards usually have higher interest rates.
  • Credit cards charge additional fees for cash advances and, often, balance transfers.
  • Credit cards typically require payments on a monthly basis while business lines of credit usually don’t.
  • Lines of credit give you access to cash.

What Will a Business Line of Credit Cost You?

The basic cost of a business line of credit is pretty straightforward: when you take, you pay.

Unlike with a traditional term loan, which is one big lump sum with regular repayments, with a business line of credit you’ll only pay interest on the cash you draw.

An Example of Withdrawing Funds & Paying Them Back

Let’s say it’s time to pay the bills, but you’re still waiting to receive payment from your own customers—making it a bit tough for you to pay what you owe.

And it’s not the first time this has happened, unfortunately.

You calculate that having a financial cushion of some amount—for our example, let's say $25K—would help prevent this problem in the future.

So you reach out to an online financial institution and apply to open a small business line of credit of up to $25K.

Next time you need to pay your bills and you’re still waiting on that cash from your customers, you can draw out funds on the business line of credit to cover your debts.

You needed $5K to pay those bills, so you pull $5K out of your business line of credit.

And even though you have a $25K line of credit, you’ll only need to pay back the $5K you borrowed, plus any interest.

Plus, keep in mind that the interest only gets charged on the $5K you borrowed, not the full $25K you have access to.

So...

If your interest rate is 11%, you’ll have to pay back $5,550 (or $5K plus $550 in interest).

Once that’s paid off, you can continue making additional draws up to the $25K maximum, only paying interest on what you’re borrowing at any given time.


Editor's Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.