How to Get a Business Line of Credit

Are you wondering, “Should I get a business loan or line of credit?” Lines of credit offer several key benefits over loans and other debt financing options, making them an attractive option for small business owners and entrepreneurs. Best of all, getting approved for a business line of credit is easier than some might think.

Successful business owners are experts when it comes to strategizing. They plan, calculate their next move and execute operating procedures to a T. However, every savvy business owner knows that sometimes expert planning isn’t enough. There are too many unexpected costs, surprise expenses, opportunities and contingencies that can throw a wrench in your plans.

It’s just as crucial to be flexible as it is to be strategic. This is where business lines of credit offer a hand. When you need to borrow capital to cover unforeseen costs, help you through a cash crunch or jump at an opportunity, getting a line of credit for your business can prove critical.

Business Lines of Credit: A Crash Course

Think of getting a business line of credit as a revolving pool of capital that can be drawn from up to a predetermined limit. Credit lines operate like credit cards in that they can be tapped from when necessary, paid off and then borrowed from again. As with a credit card, you only have to pay interest on the portion that you borrow.

Credit lines are among the best options for business owners that regularly find themselves having to pay off unexpected expenses. Unlike a term loan, the amount that you repay from the credit line is then made available to you again for future use.

It resembles a revolving door of sorts: You borrow, repay the borrowed portion with interest and can continue reborrowing the capital whenever you need.

Business Line of Credit vs. Term Loans

Loans offer a lump-sum payment, the entirety of which is repaid with interest in regular installments. In certain agreements, you must pay a prepayment penalty if you pay off a loan in full before its amortization period.

A term loan can cover the cost of a fixed, one-time purchase. Term loans make the most sense in scenarios where you need to use the entire borrowed amount right away. After you’ve taken out a loan and repaid it, you need to apply again for additional funds. This can be a time-intensive method of borrowing compared to a business line of credit.

With a credit line, business owners don’t have to worry about continually reapplying, paying origination fees and waiting through the vetting process every year or two.

For short-term needs, credit lines are a sensible solution. Unlike term loans, they can be withdrawn from and repaid on an as-needed basis and can save you the hassle of having to reapply for financing.

Why Choose a Business Line of Credit?

There are some advantages to choosing a credit line over a term loan, invoice financing or other financing methods.

Business lines of credit are appealing to entrepreneurs and business owners in unpredictable, fast-paced business environments. Here’s a quick summary of the key benefits:

• They can be repaid and borrowed again
• They can be a valuable buffer to cover emergency expenses or a business opportunity
• They can help manage seasonal and industry-specific cash flow fluctuations
• They have lower interest rates than credit cards
• They offer a great middle ground between term loans and credit cards

Opening a business credit line is often the preferred choice among business owners that want a streamlined, no-nonsense borrowing solution.

Cash-Flow Management

Superior cash-flow management is one of the main selling points of business credit lines. 

Business lines of credit can help smooth out your cash flow during predictable economic downturns. For instance, a line of credit can help you purchase inventory when you need it most, instead of buying inventory items way ahead of time and having to wait until business picks up again.

Lines of Credit and Interest Rates

Although lines of credit won’t offer you the perks and marketing incentives that some credit cards do, they often come with lower annual percentage rates (APRs). While business credit cards have APRs around the 20% mark, lines of credit usually hover just above the prime rate.

Credit lines and credit cards aren’t mutually exclusive. Ideally, you’ll apply for at least one business credit card in addition to a credit line. This way, you can benefit from convenience as well as the cost-savings associated with credit lines for larger purchases.

Since credit lines tend to have higher credit limits, they usually are the only option of the two when it comes to making five or six-figure expenses.

Potential applicants should also note the interest paid is tax-deductible. You can write off the interest you pay on your business line of credit as a legitimate business expense, which can save you money every year on your tax returns.

Secured vs. Unsecured Lines of Credit

There are two types of business lines of credit: secured and unsecured. 

Secured Credit Lines

Secured lines of credit require borrowers to collateralize the financing. In other words, they require the applicant to pledge high-value assets to secure the loan against the risk of default. Unless the credit line is secured with collateral, the lender accepts a high degree of risk if you fail to repay the debt.

When loans and credit lines are secured, the collateral mitigates the inherent risk of lending to small businesses. Collateral is any asset that the lender can assume ownership of and liquidate to pay off the balance of the loan or credit line.

You can use any of these assets to secure borrowed cash or credit:

• Real estate
• Personal or company vehicles
• Home equity
• Accounts receivable (e.g., unpaid invoices)
• Inventory
• Equipment

In most cases, lenders will ask for short-term assets such as outstanding invoices or inventory to secure a business line of credit.

Unsecured Credit Lines

An unsecured line of credit line hasn’t been collateralized. They offer no protection to lenders in case the borrower defaults on the loan or fails to make repayments. To offset the risk of unsecured lending, creditors reduce credit limits and charge higher interest rates.

The benefit of unsecured lending is that the approval process tends to be much shorter than that of a secured loan, and requires only a fraction of the necessary paperwork. Conversely, the main drawback to going with an unsecured credit line is they typically have a higher price tag thanks to their steeper APRs.

How to Apply for a Business Line of Credit

To apply for a business line of credit, follow our step-by-step process below. 

Keep in mind there is no “standard” type of credit line. There are long-term lines, short-term lines, secured and unsecured lines and credit lines with high or low interest rates. Here’s how to get approved for a business line of credit

For simplicity’s sake, we’ll assume we’re applying for a secured medium-term (less than 5 years) credit line with a $100,000 limit. Many small companies with 2 years or longer in business find that this is a common type of credit line offered to them and it is offered by alternative lenders and banks.

Check Your Credit Score

This is a crucial business-line-of-credit qualification.

Indeed, your personal credit score is one of the few aspects of your application that can make or break your chances of success. Ideally, you will apply for a low-interest line of credit with a strong credit score of 650 or higher (although some lenders will consider applications from applicants with bad credit). According to major credit-reporting agencies, FICO® scores are used by 90% of lenders and correspond to the following categories:

• 300-579: Very Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very Good
• 800-850: Exceptional

As a rule, you should expect a higher APR on your loan or credit line if you have a FICO® score of 600 or less. Online lenders may be the best way of getting a business line of credit with a bad credit or haven’t yet established a credit history.

Gather Your Documents

Once you’re ready to apply, you need to collect the various documents and pieces of identification that the lender will ask for on the business line of credit application form. 

 Online application processes are relatively streamlined compared with banks or conventional lenders. There are key pieces of information that most lenders will want, including:

• One form of a government-issued ID
• Tax returns
• Bank statements
• Cash flow statements (i.e., balance sheet and profit-and-loss statements)
• Articles of incorporation

Although not all of these documents may be required by the lender you choose (especially if you decide to go with an alternative online lender), it’s a good idea to cover all your bases and maximize the number of documents you collect during the preapplication phase.

File the Application

You’ve settled on the lender, and you’ve gathered all the documents you need to get started submitting your application. At this point, you’re just about finished. All you have to do is go to the website of the lender and follow their on-site application process.

If, however, you’ve decided to apply for your business line of credit through a bank or credit union, you need to schedule an appointment with their in-house loan officer.

Applying online usually takes minutes. Once the application is complete, you will be notified either via email or a telephone call that the lender has received your file and that it is under review. From there, an algorithm will vet your application, check your business-line-of-credit qualifications and send your file through an underwriting process.

After everything is said and done, you should receive notice regarding your application’s approval within a day. If you are applying through a bank or are filing for a secured loan, you can expect the turnaround time to be longer.

Where to Find the Best Online Business Lines of Credit

We’ve done some homework to find some of the top lenders in 2019 that you can apply through to get fast and affordable lines of credit for your business.

FundBox

Boasting a three-minute credit decision, FundBox offers some of the fastest business lines of credit on the market. There’s a catch, however. To qualify for FundBox’s loans or credit lines, you need to use compatible accounting or invoicing software that can sync with their in-house system. The online lender specializes in invoice-backed lines of credit that are secured by the borrower’s accounts receivable.

On the upside, applicants can qualify for a FundBox line of credit after only being in business for three months. Plus, FundBox doesn’t have a mandatory minimum FICO® score for applicants. They will, however, pull your credit during the underwriting process.

While useful for small businesses that are just getting their start, FundBox isn’t the right choice for everyone. If you’re a more established business and want to find lower rates, there are funding options on the market that may be more affordable than FundBox.

For short-term working capital, FundBox is worth considering if your credit score is lacking.

• APRs: 4.66 to 8.99%
• Credit limit: Up to $100,000
• Required time in business: None
• Required annual revenue: None
• Required credit score: None

BlueVine

More established small businesses should consider choosing BlueVine Capital. With rates starting as low as 4.8% and lines of credit of up to $250,000, BlueVine is affordable and competitive in their pricing structure.

BlueVine’s online application process is intuitive and takes about 20 minutes to finish. From there, it only takes minutes to get approved and you can request to have funds withdrawn within hours directly from the BlueVine dashboard.

From a user experience (UX) perspective, BlueVine’s interface looks similar to PayPal’s, and shares in its simplicity and user-friendliness.

We suggest checking out BlueVine if you’re a small business owner that is looking for consistent cash flow and an easy method of building credit. Since BlueVine’s credit lines can be repaid in fixed weekly or monthly installments, it’s easy to “set it and forget it” and find that your credit score has improved significantly in only 6 months.

• APRs: 4.8% or more
• Credit limit: Up to $250,000
• Required time in business: 6 months or more
• Required monthly revenue: $10,000
• Required credit score: 600 or higher

OnDeck

An OnDeck line of credit is one of the safest and most reliant debt financing options for small and midsize enterprises. With more than $10 billion in loans issued to small businesses globally, and a TrustScore of 4.9 out of 5 on TrustPilot and an A+ rating from the Better Business Bureau (BBB), you can rest assured that OnDeck is the real deal.

The downside to OnDeck is that their APRs start at 13.99%, making the lender one of the costliest options on the market. You get what you pay for with OnDeck, however, because their online loan application system will set you up with an in-house Loan Specialist that can help guide you through the process during normal business hours through email or a telephone call.

Expert customer service is the main selling point of OnDeck, which has advisers that specialize in more than 700 industries and niches. If you’re new to the world of online business debt financing, you may want to choose OnDeck for its simple online application process and available staff that can guide you from end-to-end.

• APRs: 13.99%
• Credit limit: Up to $100,000
• Required time in business: 12 months
• Required annual revenues: $100,000
• Required credit score: 500 or higher

StreetShares

Since launching in 2013, StreetShares has earned a name for itself as one of the best online providers of affordable business lines of credit.

The standout feature of this lender is that they will consider applicants with rock-bottom revenue, starting as low as $25,000. StreetShares is among the most accessible alternative lenders for business lines of credit.

Unfortunately, you will have to wait a while before you hear back about the status of your application once it’s filed. It’s not uncommon for StreetShares applications to take up to a week before the vetting and underwriting processes are finished.

We recommend time-strapped business owners look elsewhere for opening their line of credit. However, they have the edge on some lenders by offering an extended 36-month repayment length.

• APRs: 9% or higher
• Credit limit: Up to $250,000
• Required time in business: 12 months
• Required annual revenue: $25,000
• Required credit score: 620 or higher

Online Lending Marketplaces

A good place to start your search for a business line of credit is an online loan marketplace, which can connect you with multiple lenders after filling out a basic application. This reduces the amount of time it takes to find a lender that meets your business’s needs and whose eligibility requirements you can satisfy. On top of that, many offer resources to help business owners navigate the application process.

Getting the Best Line of Credit for Your Business

Business lines of credit make for a flexible and accessible source of debt financing for startups and burgeoning enterprises alike. However, if you’re strapped for time and can’t wait around while banks and credit unions process your application, we suggest applying for an online business line of credit.

This way, you can get the capital you need without having to worry about the status of your application. Instead, you can focus on doing what you do best—running your business.