There are some excellent options on the market. To save you time and to provide you with some clarity, we’ve researched five of the best lenders and summarized them for you in the table below.
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Company
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Min. Credit Score
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Min. Time in Business
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Min. Annual Revenue
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Loan Amount
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Interest Rate
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Fundbox
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600
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6 Months
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$100,000
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Up to $150,000
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4.66% - 8.99%
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BlueVine
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600
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6 Months
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$120,000 ($10,000 per Month)
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Up to $250,000
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Starts at 4.8%
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Credibly
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560
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6 Months
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$50,000
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$250,000
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4.8%
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Kabbage
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Not Disclosed
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12 Months
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Not Disclosed
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Up to $150,000
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Not Disclosed
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OnDeck
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600
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1 Year
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$100,000
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$6,000 - $100,000
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Starts at 35.9%
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What is a Small Business Line of Credit?
A small business line of credit is a flexible form of financing that lets your company borrow multiple times against the same credit line. As you repay all or a portion of the money you borrow (plus interest and fees), you should have access to make future draws from the same lender without submitting a new application for financing.
How Does a Business Line of Credit Work?
A business line of credit enables a business owner/borrower to withdraw funds whenever needed. The business LOC also allows the borrower to keep withdrawing funds, as long as that borrower keeps current on loan repayments and doesn’t go over the line of credit limit. Doing so may incur fees and penalties.
To get a business line of credit, you’ll need to establish that your business is legitimate (expect the lender to ask how long the business has been in existence – six months or more is a good rule of thumb for loan approval.)
You’ll also need to establish a minimum annual revenue flow, which shows the lender you have the ability to repay the line of credit. A rule of thumb here is annual revenues equal or higher than your line of credit loan request (i.e., if you’re asking for a LOC of $25,000 you’ll need to show that, at minimum, your business revenues exceed $25,000 annually.)
Who Can Use A Business Line of Credit?
Business lines of credit are suitable for established businesses with larger recurring expenses. Businesses generally use business lines of credit for everyday operations such as payroll, supplies, general cash flow, seasonal inventory, or more.
Even if cash flow is sometimes sufficient, every business has rough periods. Successful maintenance of any company requires regular cash flow. Many companies apply for a line of credit and only use it when they need it.
To be eligible, you will usually need to be in business for a year with annual revenue of $25,000. Additionally, applicants may need a credit score of 600 or above. Lines of credit usually need to be repaid within 3-12 months and are a form of short-term financing.
APR rates can range from 9%-99% depending on credit history and annual business turnover, among other variables. While the rates can be high, this is offset because businesses only need to use what they require and only pay interest on what they borrow.
How to Get a Business Line of Credit
Below are five general steps you can take to open a business line of credit.
- See where you stand. When you apply for a business line of credit, the lender may review details like your credit score (personal and business), time in business, and annual income. It’s critical to know where you stand in each category.
- Determine if you’re eligible. Make a list of lenders offering business lines of credit with elgibillity criteria you can likely satisfy. If you know you have fair credit and a lender requires good credit, you shouldn’t include the lender on your list of possible funding sources.
- Gather your documents. Many lenders will require you to submit documentation along with your financing application. Having your business tax returns, business bank statements, and other financial reports ready could speed up the funding process.
- Shop around. Comparing interest rates, fees, and benefits from multiple lenders can help you find a business line of credit that’s best for your situation.
- Apply. Once you settle on your preferred business line of credit, it’s time to apply. Be sure to fill out the complete application and send in any documentation the lender requests promptly
Business Credit Cards vs. Small Business Credit Lines
Business credit cards and business credit lines own the same financial lineage – they both offer business owners access to much-needed capital.
That said, there are differences between the two.
- A small business line of credit: Essentially, a small business line of credit is what’s known in banking circles as a revolving loan. The loan amount and repayment terms are agreed upon by the lender and the borrower in advance. Once the line of credit is approved, the business owner can access the line of credit funds at any time. The borrower can repay the line of credit at any time and even at minimal amounts along the way. The fee to garner a small business line of credit is the interest rate (along with any loan service fees) charged by the LOC lender to the borrower.
- A business credit card: A business credit card offers a similar deal – access to a fixed amount of capital on an ongoing basis, with interest rates and fees charged by the card provider to the cardholder. While a business credit card is similar to a line of credit, not every merchant may accept the specific business credit card. On the upside, a business credit cardholder may earn card rewards and perks with the card, such as cashback, frequent flier miles, and discounts on common business services like vehicle rentals, hotel stays, and dining and entertainment venues. Additionally, if the cardholder pays the entire balance off every month, the business owner is basically getting an interest-free loan from the credit card company.
Secured vs. Unsecured Line of Credit
One element that a line of credit has in common with a term loan is the possibility of it being secured or unsecured. Here are some of the key differences between a secured and unsecured business line of credit.
- Unsecured business line of credit: If a lender is comfortable with the risk profile of the borrower, they may approve an unsecured business line of credit, meaning that they don’t demand collateral. This is usually the case with well-established companies that have a good revenue record and are requesting a smaller amount (generally less than $100,000).
- Secured business line of credit: when a lender feels there’s a higher level of risk, they may insist upon a secured line of credit. In this situation, they will demand some form of collateral – an asset belonging to the company that the lender can claim if the borrower defaults on the loan.
Final Thoughts
A small business line of credit can provide a financial cushion when your business experiences a cash flow crunch. If you anticipate slow seasons in your business, it may be best to apply for this flexible financing option in advance, long before your business needs to access it.
