Business Line of Credit: Compare the Best Options
Taking out a new business line of credit could be just what your company needs to achieve its growth goals. But there are multiple options to consider, so it’s important to research before finalizing your decision.
This guide will break down everything you need to know about business lines of credit, their eligibility requirements and how to choose the best fit for your company’s goals. Keep reading to learn more.
What is a business line of credit?
A business line of credit allows companies to borrow funds as needed rather than through a single lump sum like a traditional loan. You only pay interest on the amounts you borrow and are typically free to repay your balance in full at any time without facing prepayment penalties.
As long as you use the funds on legitimate business expenses, there usually aren’t further requirements for what you can and can’t spend the money on. You can use a business line of credit to cover payroll, to purchase needed materials and for any expenses your company may have.
If you want to learn more, read this guide covering what a business line of credit is before proceeding.
How does a business line of credit work?
With a few exceptions, business lines of credit work much the same way business credit cards do. These revolving credit accounts allow you to spend up to a certain limit as a business owner as long as you make your payments on time. Here are some more details you should know before taking out a line of credit for your business:
Fees
The fees you incur from a business line of credit will depend on your chosen lender. Here are some of the most common ones:
- Annual fee: This is a flat-rate fee you pay on a yearly basis to keep the line of credit open.
- Origination fee: This is a one-time fee that you pay to have your application processed, and your account opened.
- Draw fee: This is a fee charged each time you make a withdrawal from your active business line of credit. It’s often charged as a percentage of the total amount you withdraw.
- Maintenance or inactivity fee: Some companies charge fees for inactivity, which may also be called maintenance charges. You will only encounter this fee if you have an active business line of credit that you don’t use within a specified time frame.
Remember, you may or may not incur these fees and others like them. It will depend on your chosen lender and how you use your business line of credit over time.
Annual percentage rates (APRs)
The annual percentage rate for a line of business credit can vary widely based on factors including:
- The current prime interest rates set by the Federal Reserve
- The lender you choose
- Whether you select a secured or unsecured line of credit
- Your credit score
- How long your company has been in business
- The amount of annual revenue your business generates
As with individual credit cards, banks are typically willing to offer better interest rates to borrowers they feel pose the least risk. If you aren’t happy with the interest rate offers you receive, you may be able to improve them by working on your credit score or increasing your annual revenue.
Repayment terms
Your business line of credit repayment terms can also vary significantly based on the lender you choose. For example, you may be asked to repay any funds you borrow as soon as a few months after opening the line of credit or as long as five years after doing so.
One unique aspect of business lines of credit is that some lenders charge weekly or monthly fees on outstanding balances instead of annual interest. This can complicate your calculations.
For example, if you take out a $10,000 business line of credit, you may be asked to pay 2% of the amount you borrow monthly. That may sound better than a 15% APY, but when you factor in how long it may take your company to pay the full value back, you may end up paying significantly more in interest. It’s another reason why it’s important to evaluate your options carefully before choosing a lender.
Your business line of credit options
Now that you know what a business line of credit is, it’s time to begin zeroing in on the best business line of credit for your specific needs. Keep reading to discover your options.
Secured business line of credit
If you want a small business line of credit with the best interest rates possible, a secured credit line will likely be your best option. These involve putting up collateral to offset the risk the lender assumes by giving you the line of credit.
You may be able to secure your line of credit with company property, inventory or vehicles. If you don’t have enough company assets to take out a secured line of credit, some lenders may accept your personal assets, such as your home, as collateral.
Remember that if you default on your line of credit, the assets you put up as collateral will likely be seized to repay the debt, so make sure that's a risk you're comfortable taking.
Unsecured business line of credit
You can also consider an unsecured business line of credit. These may not require collateral but will likely ask you to pay a higher interest rate.
It’s also worth mentioning that unsecured lines of business credit may be more challenging to qualify for because the lender has to assume more risk. You may also want to look into the best unsecured business loans if you’re interested in borrowing a lump sum of cash upfront.
Business credit cards
Business credit cards are similar to lines of credit in that both are revolving accounts you can use to cover business expenses. However, there are a few key differences worth noting.
First, business lines of credit give you access to cash in your bank account, whereas credit cards typically charge a high cash advance fee. You may be able to pay for the same things with your credit card while avoiding this fee, but it’s something to keep in mind.
Additionally, the best business credit cards often offer cash back and other rewards for qualifying spending, while lines of credit don’t usually have such benefits. That means it could pay to use a business credit card over a line of credit in certain situations. Just make sure to conduct a thorough rate comparison before deciding.
SBA loans
SBA loans are partially guaranteed by the federal government and are designed to help small businesses meet their financial needs. Although SBA loans are more common, lines of credit are also available in some circumstances through the Small Business Administration’s CAPLines program.
For example, you can take out a Seasonal CAPLine if you’re a small business owner who needs to cover increased labor costs and expenses brought about by changes in seasonal demand. There are also:
- Contract CAPLines: For businesses that need extra funding to execute signed contracts
- Builders CAPLines: For companies that need funds to complete work on residential or commercial buildings
- Working CAPLines: For general small business owners looking for a working capital line of credit. May have lower fees than even the best working capital loans from non-SBA lenders
If you’re interested in a line of credit for a new business, the SBA’s CAPLines program is worth considering, but it may be harder to gain approval if you run a larger or more established business.
How to get a business line of credit
Whether you need a startup business line of credit or something for a more established company, following the right application process is important. You can use these steps to get started:
1. Determine the amount of funding you need.
First, consider how much money you need to achieve your goals. Is it $10,000 or $250,000? The answer will impact your borrowing strategy.
2. Consider your eligibility.
Next, make sure you’re eligible for a business line of credit. You'll need a decent credit score (typically around 660, at least) and a solid business that generates good annual revenue to get the best terms.
You will also likely need an EIN from the IRS and a business bank account for payment. You can review this guide covering how to open a business bank account if you still need to get that taken care of.
3. Compare lenders.
Now you’re ready to start looking at your options for lenders. Many companies require you to go through the full application process before offering terms. It could be beneficial to submit multiple applications simultaneously so you can select the best deal.
4. Submit an application.
All that’s left to do at this point is submit your application(s). The lender will review your supporting materials and get back to you with any follow-up requests they may have. Within the next several weeks, you should receive an answer and will, hopefully, be able to access your funds soon after that.
Where to get a business line of credit
You can get a business line of credit from a bank, credit union, online lender and even the Small Business Administration (SBA). Most companies that offer LLC loans and other types of business funding also make business lines of credit available to qualified borrowers.
How long does it take to get a business line of credit?
Getting started with a business line of credit can take as little as a few weeks to as long as a few months. It takes time for lenders to verify that you satisfy all their business line of credit requirements.
Plus, if you are trying to take out a business line of credit with bad credit, you may need to collateralize the credit line. That adds processing time to your application because the lender must assess your assets and evaluate their worth before giving you terms.
That being said, it takes about the same amount of time to get a small business loan. So even if it takes a few months to activate a line of credit, that may not be any slower than your alternatives.
Check out this guide covering the best fast business loans for quick cash if you need funding as soon as possible.
What are the requirements for a business line of credit?
As you compare business lines of credit from different lenders, you'll likely notice differences in their qualification criteria. However, every lender will look at the following factors when deciding whether to approve your application:
- Your personal credit score
- The annual revenue your business generates
- How long your company has been in business
- Whether you have any collateral to secure the line of credit
- Your current debt obligations
Every lender has different standards for each of these factors. Sometimes a strength in one area, such as your personal credit score, can offset a weakness in another, such as your company not generating much annual revenue. But not always.
You'll also need basic personal and company identification materials to qualify for a line of credit. For example, you may need an employee identification number (EIN) from the IRS to submit your application.
Summary of Money's business line of credit: compare the best options
Taking out a business line of credit for a new business can help your company cover payroll, pay for supplies and achieve its growth goals. But it’s important to evaluate your options before borrowing any money. Your best option will depend on whether your company needs to collateralize its line of credit and how you plan on using the funds you borrow.