What is a business line of credit and how do you get one?
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“Verified by an expert” means that this article has been thoroughly reviewed and evaluated for accuracy.
BLUEPRINT
Published 12:14 p.m. UTC Jan. 4, 2024
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A business line of credit can help you cover ongoing business expenses and manage your cash flow. Unlike business loans that provide one-time, lump-sum funding, business lines of credit provide access to funds on an as-needed, revolving basis. This flexibility can help streamline your finances and cover necessary costs as your business grows.
If you’re thinking about applying for a business line of credit, here’s how they work, what you’ll need to apply and how to compare options.
What is a business line of credit?
Business lines of credit are a type of financing offered to business owners by banks, credit unions and online lenders. They’re often used to help reduce cash flow hiccups, grow inventory and cover payroll as a business hires new employees to meet growing demand.
How a business line of credit works
A business line of credit is a revolving credit line that you can repeatedly draw on and pay off on an ongoing basis. This means you can borrow as little or as much as you need up to your limit, and you’ll repay the borrowed amount plus interest. Repayment periods for business credit lines vary depending on your lender and could be as short as a few months or as long as five years.
While this type of funding works similarly to a business credit card, some key differences exist. Business credit cards often — though not always — have higher interest rates than business lines of credit. And business lines of credit might offer more flexibility.
Business lines of credit can be either secured or unsecured. With a secured credit line, you must pledge an asset as collateral in case you default. For instance, your credit line could be secured by a commercial building you own or a certificate of deposit (CD). Because this is less risky for the lender, secured credit lines can have lower interest rates and higher borrowing amounts compared to unsecured lines.
On the other hand, unsecured credit lines don’t require collateral, though you’ll likely need to make a personal guarantee to qualify. A personal guarantee states that your lender can take your personal assets if you default on your business credit line.
Which is right for you? Business loan vs. business line of credit
Credibly business loan
4 steps to get a business line of credit
1. Determine your eligibility
Eligibility criteria for a business line of credit can vary by lender. However, most require good personal credit (or excellent business credit). Your business must also have been in operation for a minimum amount of time (typically at least six months to two years), and it must generate sufficient annual revenue — often at least $100,000, though some lenders have lower requirements.
Understanding your personal and business credit as well as having a good handle on your business history and finances, is essential.
2. Research lenders and narrow down your options
Once you’ve considered your eligibility, it’s time to research lenders and narrow down your options. Consider how much you want to borrow and your ideal repayment term as well as lender fees and requirements.
Use this information to help guide your search and find the best business line of credit for your situation.
3. Gather documentation and apply
Lenders often require up to two years of business tax returns and might also ask for personal tax returns as well. In addition, you’ll need to provide articles of incorporation, business bank statements, profit and loss data, and other documents to verify your business’s health. Collecting this documentation before you start an application for a business line of credit could save you time.
Once you’ve gathered the necessary documentation, you can move forward with the application process of your chosen lender. Some lenders offer online applications, but others might require you to apply over the phone or in person.
4. Get access to your funds
If approved, you can then begin drawing funds from your business credit line. When you draw on it, the funds will be disbursed to an account of your choosing. You’ll then repay the amount of money you’ve used plus interest over an agreed-upon term.
National Funding business loan
What you should know
While many business loans come with short terms, National Funding offers both short- and long-term loans. Its short-term loans come with terms from four months to 18 months while you’ll have two to five years to repay a long-term equipment financing loan — providing you with more flexibility if you’d prefer more time to pay off a loan. You can also take advantage of an early payoff discount if you repay your loan ahead of schedule.
With National Funding, you can take out a short-term loan of $10,000 to $500,000 or an equipment financing loan of up to $150,000. This lender accepts credit scores as low as 600 and a time-in-operation minimum of six months, and if you’re approved, you could get your funds as soon as the next business day.
Keep in mind that to be eligible for a loan from National Funding, your business must generate an annual revenue of at least $250,000, which is higher compared to some lenders. Additionally, National Funding charges a factor rate instead of an interest rate — this essentially translates to a flat fee that you’ll pay upfront instead of interest that would be paid over time.
Note that this lender doesn’t disclose its maximum possible factor rate. If you’d like more information regarding what you might qualify for beforehand, you’ll need to apply and discuss your options with one of the lender’s funding specialists. National Funding also charges an origination fee that could increase your overall costs.
Pros and cons
Pros
- Offers repayment terms as long as five years.
- Early repayment discount available.
- Accepts fair credit scores.
Cons
- Doesn’t disclose maximum factor rate online.
- Charges an origination fee.
- Higher annual revenue requirement compared to some lenders.
More details
- Loan amounts: $10,000 to $500,000.
- Repayment terms: 4 months to 5 years (depending on loan type).
- Discounts: Early repayment discount (7% of remaining balance).
- Fees: Origination fee (1% to 5%).
- Min. credit score: 600.
- Required time in operation: 6 months.
- Required annual revenue: $250,000.
- Time to fund: As soon as the next business day after approval.
How to compare the best business lines of credit
To find the best business line of credit for your situation, research and compare the following factors:
- Interest rates: Rates for business credit lines vary by lender. Additionally, having good to excellent credit generally means qualifying for lower rates.
- Credit limits: Different lenders may offer different credit line limits. Consider whether you’ll benefit most from a small or large credit line.
- Repayment terms: You’ll typically have a few months to a few years to repay what you borrow on a business line of credit. Choosing the shortest term you can afford can help keep your interest costs as low as possible.
- Fees: Some lenders charge fees on business lines of credit, such as origination fees, annual fees, inactivity fees and prepayment penalties. All of these can increase your overall borrowing costs.
- Eligibility requirements: Some lenders may require good or excellent credit to qualify for a business line of credit while others might accept a lower credit score. Also look into other requirements, such as how long your business must have been in operation and how much annual revenue it must generate.
Frequently asked questions (FAQs)
You’ll need to meet your lender’s specific eligibility criteria to get a line of credit for an LLC. Lenders often have credit score, annual revenue and total time-in-business requirements for business lines of credit. However, exact requirements can vary widely by lender.
You’ll also need to provide documentation when you apply, such as tax returns, bank statements and more.
It’s possible for a small business to get a line of credit. However, whether your business will qualify depends on your personal and business credit, overall business health and lender requirements.
Each lender has its own credit score criteria, so there’s not one specific credit score you’ll need to get a business line of credit. For instance, some require a minimum credit score of 680 while others — such as Fundbox — will accept a minimum of 600.
Business lines of credit don’t typically require a down payment, though you’ll need to provide collateral if you opt for a secured line of credit. Collateral often includes assets like commercial real estate, accounts receivables or equipment.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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