What is a business line of credit?
Unlike a traditional small-business loan — where you receive a lump sum of capital and repay it over a specific period of time, with interest — a business line of credit is a more flexible form of financing.
With a line of credit, you receive access to a set amount of capital — say, $150,000 — and can draw funds as needed. You only pay interest on the funds that you draw. You then repay the funds over time, typically on a weekly or monthly schedule.
You can continue to draw on your business credit line as often as you’d like, as long as you make payments on time and don’t exceed your credit limit.
» MORE: Is a business loan or line of credit right for you?
How does a business line of credit work?
Business lines of credit are available from banks, credit unions and online lenders. Although funding amounts and repayment terms vary, lines of credit typically have lower maximums and shorter terms compared to traditional business term loans.
Secured vs. unsecured business lines of credit
A secured business line of credit requires you to put up assets such as inventory or property as collateral. If you fail to pay back the credit line, your lender could seize your assets. Unsecured business lines of credit, on the other hand, don’t require collateral, but some lenders may still require a personal guarantee or a lien on your business’s assets.
A personal guarantee gives a lender the right to go after your personal assets, like your house, if you default on a loan. A UCC lien is similar; a lender can seize your business assets if you haven’t repaid a loan.
When comparing lenders, ask whether they require collateral, a personal guarantee or a lien so that you can find the option that’s best for your business.
Business line of credit vs. credit card
Business credit cards are technically lines of credit, but they differ from traditional business lines of credit in several ways:
Business line of credit | Business credit card |
Higher credit limit. | Lower credit limit. |
Provides actual cash in your bank account when you make a draw. | Cards are used for purchases; you can get cash, but you’ll be charged a cash advance fee to do so. |
May be secured by collateral. | Can be secured by collateral, but not as common. |
Doesn’t typically include rewards. | Often have rewards or cash back for spending; rewards are typically related to business expenses. |
No interest-free period. | May include 0% interest promotion, which allows you to pay no interest on your balance for a specific time period after signing up for the card. |
Lower interest rates than credit cards. | Higher interest rates than lines of credit. |
Overall, business credit cards tend to work best for smaller ongoing expenses and for newer businesses without established finances, while business lines of credit work best for larger ongoing expenses and more mature businesses.
Business line of credit rates and fees
Current business line of credit rates can range from 10% to 99% APR. The interest rate you receive will vary based on your lender, credit score, financial history and time in business, among other factors.
In general, the stronger your credentials, the lower interest rates you’ll receive. Banks tend to offer more competitive business line of credit rates compared to online lenders.
Depending on your lender, you may also have to pay fees on your line of credit, such as:
Origination fee. Fee charged to process your application.
Account maintenance fee. Monthly or annual fee associated with managing your account and keeping your business line of credit active.
Draw fee. Fee charged each time you draw on your credit line.
Inactivity fee. A lender may charge this fee if you don’t draw from your line of credit within a specified period of time.
Minimum APR | Maximum APR | |
|---|---|---|
Bank of America Business Advantage Unsecured Line of Credit | 10.00%. | Undisclosed. |
SBA CAPLines of credit | 11.5 | 15 |
Wells Fargo BusinessLine® Line of Credit | 10.25 | 18.25 |
Bank of America Cash Secured Line of credit | Undisclosed. | Undisclosed. |
Fundbox - Line of credit | 36 | 99 |
Headway Capital - Line of credit | 35 | 80 |
Bluevine - Line of credit | 20 | 50 |
Wells Fargo Small Business Advantage® Line of Credit | 13 | 15 |
OnDeck - Line of credit | 39.9 | 77.9 |
Where to get a business line of credit
Banks and credit unions
Banks and credit unions can offer different types of business credit lines, including secured and unsecured business lines of credit, as well as SBA lines of credit.
Although these lenders can offer business lines of credit with competitive interest rates, you’ll typically need to meet strict requirements to qualify. You’ll likely need to have strong revenue, good credit and several years in business.
Compared to online lenders, banks and credit unions can also be more likely to require physical collateral to secure your credit line (especially for larger limits), as well as more likely to charge additional fees, including annual and inactivity fees.
Online lenders
Online lenders, like Headway Capital and Fundbox, generally have more flexible business line of credit requirements compared to banks and credit unions. Some online lenders will work with startups or businesses with bad credit.
Online lenders typically have streamlined application processes and fewer fees, and may be able to issue small-business lines of credit in a matter of days. However, these lenders are also likely to charge higher interest rates than banks and may have lower credit limits.
» MORE: Compare the best startup business lines of credit
How to get a business line of credit
To get a business line of credit, you can follow these steps:
1. Evaluate your financing needs
You’ll initially want to determine why you need funding and how quickly you need it. If you’re looking for a working capital line of credit to cover payroll, for example, you may need financing as quickly as possible. On the other hand, if you want to keep a line of credit in your back pocket as an emergency fund, you may not be in such a rush.
It's also important to determine how much capital you can afford. You can use a business line of credit calculator to estimate potential payments and interest costs.
2. Review business line of credit requirements
Next, you'll want to evaluate your business's credentials — time in business, annual revenue, personal credit score — to determine what lines of credit you can qualify for.
Traditional lenders, like banks and credit unions, will likely have stricter qualifications, requiring multiple years in business and a strong credit history. Online lenders can be more lenient and some may be willing to work with startups and/or borrowers with bad credit.
At a minimum, therefore, you’ll want to be able to meet these business line of credit requirements:
Credit score: 600 or higher.
Time in business. Six months or more.
Annual revenue. $50,000 or more.
If you’re looking for a secured business line of credit, you should also make sure you know what assets you’re going to put up as collateral and how much they’re worth.
3. Research and compare lenders
Once you have a better understanding of your financing needs and qualifications, you can research and compare small-business lenders to find the right option for your company.
Ultimately, you can apply for a business line of credit through a bank, credit union, online lender, or even work with an online marketplace to submit a single application and compare offers from multiple lenders at the same time.
Interest rates, borrowing limits and qualifications can vary by lender.
4. Gather required documents and apply
As part of your application, lenders will typically consider your credit and financial history — and ask you to provide documentation, such as:
Personal and business tax returns.
Personal and business bank statements.
Business financial statements (e.g., profit and loss statement or a balance sheet).
You may also be required to provide physical collateral or sign a personal guarantee.
Depending on your lender, it may take anywhere from 24 hours to several weeks to complete the application and underwriting process.
5. Review your loan agreement and get funds
Once you’ve been approved, your lender will send you a business line of credit agreement to review and sign. You’ll want to review it thoroughly to make sure you understand all of the terms and conditions.
You might ask a business advisor or attorney to look over the document as well. If you have any questions or concerns, you should reach out to your lender for clarification before signing.
After you’ve signed the loan agreement, you’ll be able to draw on your credit line as needed. Your lender may require you to make a minimum draw amount, $1,000, for example, so keep this in mind as you anticipate your financial needs.
Business line of credit calculator
Business line of credit calculator
When you draw from a business line of credit, you only pay interest on the funds that you borrow. You then repay the funds over time, based on a schedule set by your lender.
Enter a withdrawal amount, repayment term and annual interest rate to estimate your monthly payment, total interest costs and the total amount repaid.
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Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.
In general, the better your credit, the more options you’ll have available to you, and the lower interest rates you’ll be able to receive.
