Provides flexibility in borrowing
Interest is only paid on amount borrowed
Can help manage cash flow and expenses
Can be used for various business needs
Can be a safety net for unexpected expenses


Can be difficult to qualify for
May have higher interest rates than loans
May have fees for usage and maintenance
May require collateral or personal guarantees
Can lead to overspending or debt accumulation

Note that these are not exhaustive lists, and the specific pros and cons may vary depending on the lender, terms, and individual business situation. It's important for businesses to carefully consider their options and weigh the potential benefits and drawbacks before deciding whether a business line of credit is right for them.


How Does A Business Line Of Credit Differ From Other Loans?

A business line of credit isn’t your only funding option. Although it’s a good choice, weighing your other options is a smart move.

  • Business Line of Credit vs Business Credit Cards: Business credit cards typically have higher interest rates than a line of credit.
  • Business Line of Credit vs Business Loans: A business loan provides a lump sum upfront that must be repaid in installments.
  • Business Line of Credit vs Payday Loans: A payday loan is a short-term loan option that usually doesn’t require a credit check. But unlike a business line of credit, a payday loan is tied to your personal income.


Secured vs. Unsecured Business Line of Credit: Key Differences

In the world of business financing, understanding the distinction between a secured and unsecured business line of credit is vital. These two types of credit lines serve as major pillars of small to large business funding, each with its own set of advantages and caveats. The choice between a secured and an unsecured line can significantly impact your business's financial flexibility, cost of borrowing, and risk exposure.

Secured Business Line of Credit

A secured business line of credit is a type of loan where borrowers pledge specific assets as collateral to secure the loan. This collateral could be equipment, inventory, or properties that the business owns. If the borrower defaults on the loan, the lender can seize these assets to recover their funds. Due to the collateral, lenders often offer secured lines of credit with lower interest rates and higher credit limits compared to unsecured lines.

Unsecured Business Line of Credit

On the other hand, an unsecured business line of credit does not require any collateral. As a result, lenders face more risk and typically counterbalance this by charging higher interest rates and offering lower credit limits. Qualifying for an unsecured line usually requires a strong credit history and a successful business track record.

Understanding Differences Between Secured and Unsecured LOC

  • Collateral: Secured lines require collateral, while unsecured lines do not.
  • Interest rates: Secured lines typically have lower interest rates due to less risk to the lender.
  • Credit limits: Secured lines often have higher credit limits compared to unsecured lines.
  • Qualification requirements: Unsecured lines typically require stronger credit and a proven business track record.
  • Risk: With secured lines, the borrower risks losing their assets if they default on the loan.


Revolving vs. Non Revolving Line of Credit: Which One Fits Your Needs?

When it comes to money matters, it's important for business owners to know the contrasts between revolving and non-revolving lines of credit. 

Revolving Business Line of Credit

A revolving line of credit is similar to a credit card for businesses. It allows them to borrow money up to a certain limit, pay it back, and borrow again. It's available for different types of businesses, and it can be easier to get than regular loans. The main things to consider are the limit on how much can be borrowed and the interest rate. Businesses usually pay monthly interest on what they borrow, and they can choose how much to borrow and when to pay it back.

Non Revolving Business Line of Credit

A non-revolving line of credit is like a traditional loan for businesses. It provides a lump sum of money that needs to be repaid in fixed installments over time. It is available for various types of businesses. Getting it may involve more requirements compared to a revolving line of credit. The main conditions are the loan amount and interest rate. Repayment terms typically involve making regular payments, including interest, until the loan is fully paid off.

Comparing Revolving and Non-Revolving LOCs

  • Borrowing mechanism: Revolving line of credit allows borrowing like a credit card, while non-revolving line of credit provides a lump sum.
  • Repayment structure: Revolving line of credit offers flexibility in repayment, whereas non-revolving line of credit requires fixed installments.
  • Borrowing flexibility: Revolving line of credit allows repeated borrowing, akin to a credit card, while non-revolving line of credit permits one-time borrowing.


Tips On Using A Line Of Credit For Your Business

Here are some tips on using a line of credit for your business:

  • Have a plan: Before applying for a line of credit, make sure you have a plan for how you will use the funds. Consider factors such as cash flow needs, business goals, and potential risks.
  • Use it wisely: A line of credit can be a valuable tool, but it's important to use it wisely. Avoid overspending or borrowing more than you can realistically repay.
  • Monitor your usage: Keep track of your borrowing and repayment activity, and make sure you are staying within your credit limit. Regularly monitoring your usage can help you avoid overspending or accruing excessive interest or fees.
  • Make timely payments: Paying back your line of credit on time can help you maintain a good credit score and avoid late fees or penalties. Consider setting up automatic payments or reminders to ensure you stay on track.
  • Keep your lender informed: If you anticipate any changes in your business or financial situation, such as a decrease in revenue or increase in expenses, keep your lender informed. This can help you avoid potential issues and work together to find solutions.
  • Consider refinancing or renegotiating terms: If you find that your line of credit is no longer meeting your business needs or has become too expensive, consider refinancing or renegotiating the terms with your lender. This can help you find a more affordable or flexible solution.

Using a line of credit for your business requires careful planning, monitoring, and management. By following these tips, you can use a line of credit to help manage your finances and support your business goals effectively.

business lines of credit requirements


How A BLOC Can Help During Economic Downturns

During economic downturns, many businesses experience cash flow challenges and uncertainty. A business line of credit can be a valuable tool to help businesses weather these challenges and maintain their operations. Here are some ways a business line of credit can help during economic downturns:

  • Manage cash flow: A business line of credit can provide a source of working capital to help cover expenses during slow periods or unexpected cash flow shortages.
  • Flexibility: Unlike traditional loans, a business line of credit offers flexibility in terms of when and how funds are used. Businesses can draw on the line of credit as needed and only pay interest on the amount borrowed.
  • Preserve credit: Using a business line of credit to manage cash flow can help businesses avoid defaulting on other loans or lines of credit, which can damage their credit score and make it harder to secure financing in the future.
  • Maintain operations: With a business line of credit, businesses can continue to pay employees, purchase inventory, and cover other expenses during economic downturns, which can help them survive and even thrive during tough times.
  • Take advantage of opportunities: Economic downturns can create opportunities for businesses to expand, invest in new equipment, or acquire new businesses at lower prices. A business line of credit can provide the financing needed to take advantage of these opportunities.

A business line of credit can be a valuable tool for businesses during economic downturns. It provides flexibility, preserves credit, and allows businesses to maintain operations and take advantage of opportunities, even in uncertain times.


What To Do If You're Denied A Business Line Of Credit

Being denied a business line of credit can be frustrating, but there are steps you can take to improve your chances of getting approved in the future. Here are some things you can do if you're denied a business line of credit:

  • Review your credit report: Check your credit report for any errors or inaccuracies that may have contributed to the denial. If you find any errors, contact the credit bureau to dispute them.
  • Address any credit issues: If you have negative marks on your credit report, such as late payments or high credit utilization, take steps to address them. Make on-time payments, pay down debts, and avoid opening new lines of credit.
  • Ask for feedback: Contact the lender and ask for feedback on why your application was denied. This can help you identify areas for improvement and make changes to your business or application.
  • Consider alternative financing options: If you're unable to secure a business line of credit, consider alternative financing options such as a business loan, invoice financing, or a business credit card.
  • Build your business credit: Building a strong business credit profile can improve your chances of getting approved for a line of credit in the future. Make on-time payments, maintain low credit utilization, and establish a solid business history.

Remember that being denied a business line of credit doesn't mean you're out of options. Take proactive steps to address any issues and consider alternative financing options while you work to improve your credit profile and financial situation.


Final Word

A business line of credit can be a valuable financial tool for businesses of all sizes. It provides a flexible source of funding that can be used to manage cash flow, cover expenses during slow periods, and take advantage of opportunities. However, it's important to carefully consider the terms and conditions of any line of credit before accepting an offer and to use the funds responsibly to avoid accumulating debt.

Frequently Asked Questions (FAQ)

How hard is it to get a business line of credit?

Getting a business line of credit can be challenging, but it depends on certain factors. Lenders consider things like your credit history, income stability, and the size of your business. For example, if you're just starting a small business with no credit history, it might be harder to get a line of credit. However, if your business has been successful for a while and you have a good credit score, it becomes easier to qualify. It's important to show that your business is financially responsible and has the ability to pay back any borrowed money.

Can you withdraw money from a business line of credit?

Yes, you can withdraw money from a business line of credit. It's like having extra funds available for your business whenever you need them. For example, if you have a $10,000 business line of credit, you can withdraw $2,000 to buy new equipment or cover expenses.

What are the interest rates on business lines of credit?

Interest rates on business lines of credit can vary greatly depending on several factors, including the creditworthiness of the borrower, whether the line of credit is secured or unsecured, and the lender's policies. For the most current information, it is best to directly consult with potential lenders or a financial advisor.

Can you get a business line of credit with bad credit?

Yes, it is possible to obtain a business line of credit even with bad credit, although it may be more challenging and often comes with higher interest rates. Some lenders specialize in working with businesses that have poor credit history. They typically focus on the overall financial health of your business and its cash flow, rather than solely on your credit score. To better understand the process, eligibility requirements, and potential lenders, you may want to read our detailed article on obtaining a business line of credit with bad credit.

Can you get your business line of credit increased?

Yes, it is possible to increase your business line of credit. Many lenders periodically review credit lines and may offer increases based on your payment history, improved credit score, and the financial health of your business. You can also request an increase proactively, but make sure you're prepared to demonstrate why your business can handle a larger credit line. For a more details, consider reading our article on how to increase a business line of credit.

Does opening a business line of credit improve your company's credit score?

Yes, responsibly managing a business line of credit can positively impact your company's credit ratings. Timely payments and maintaining a reasonable balance can demonstrate your business's creditworthiness. However, late payments or over-utilization of your credit line can harm your score. Note that not all lenders report to credit bureaus, so choose a lender that does if your goal is to build credit. For more information on this topic and other strategies to build business credit, you may find our article about how to build business credit quite helpful.

About the Authors

Sarah Sharkey

Written by: Sarah Sharkey

Personal Finance Writer

Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. Sarah enjoys traveling, hiking and reading when she is not writing.

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Chip Stapleton

Reviewed by: Chip Stapleton

Finance Manager

Chip Stapleton is a Series 7 and Series 66 license holder, CFA Level 1 exam holder, and currently holds a Life, Accident, and Health License in Indiana. He has 8 years of experience in finance, from financial planning and wealth management to corporate finance and FP&A.

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Somer G. Anderson, Ph.D.

Fact checked by: Somer G. Anderson Ph.D., CPA

Accounting and Finance Professor

Somer G. Anderson has been working in the Accounting and Finance industries for over 20 years as a financial statement auditor, a finance manager in a large healthcare organization, and a Finance and Accounting professor at Maryville University.

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