What is a Small Business Line of Credit?
A business line of credit provides access to funds to spend as your company needs. A little bit like a credit card, you withdraw only what you need, up to the credit limit, and pay interest only on the amount you withdraw. You are never obligated to withdraw the entire credit line amount.
Advantages
- Flexibility of use
- Pay interest only on what you spend
- Offers control of funds
- Helps build credit
Disadvantages
- Collateral may be required
- Can have costly fees
- May have to re-submit paperwork to reuse funds
Loan Amount
$5,000—$500,000
Estimated Repayment Term
6 months—3 years
Interest Rate
Starting at 8%
Speed of Funding
As fast as 1 day
How Does a Small Business Line of Credit Work?
A small business line of credit functions more similarly to a credit card than a small business loan, providing more flexibility than any other funding type. The benefits of a business line of credit make it a preferred funding option for many business owners, offering you the chance to:
Use revolving funds
Small business lines of credit provide businesses with an approved credit limit that you are free to borrow from, on your own terms, on a rotating basis.
Improve cash flow management
A line of credit is not limited to one specific purchase or purpose. Spend the funds and reuse them on an as-needed basis, making payment on the used portion of the credit line.
Raise your credit score
Make your payments on time and raise your score over the lifetime of the small business line of credit
Small Business Line of Credit Qualifications
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Time In Business: 6+ Months
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Annual Revenue: $200,000+
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Credit Score: 575+
How Does a Business Credit Line Differ From a Credit Card?
While a small business line of credit and a business credit card may seem similar, there are three distinct differences between the two:
Access to Working Capital
A line of credit is able to provide you with up to $150,000, while credit cards can only provide limits of just over $50,000. While it’s possible to receive a cash advance from your business credit card, they are typically only used for credit purchases. With a line of credit, you can deposit your funds directly into your bank account without incurring additional fees.
Repayment Schedules
While a business credit line is quite flexible, business credit cards provide more flexibility when it comes to repayment. Aside from minimum monthly payments, there is no set repayment schedule for a credit card. Small business lines of credit, on the other hand, come with a set repayment schedule. Borrowers will pay either daily, weekly, or monthly installments over the course of 6-12 months.
Fees and Rewards
Business credit cards usually offer attractive rewards programs that lines of credit cannot. These card perks do, however, typically come with an annual fee which recoups the cost of these benefits for the provider. While small business lines of credit don’t feature any rewards programs, they don’t carry any annual fees.
Secured Lines of Credit vs. Unsecured Lines of Credit
One of the most important questions you should ask is if the business LOC is secured or unsecured. Let’s compare and contrast each line of credit.
| Secure Lines of Credit | Unsecured Lines of Credit |
| No purchase restrictions | |
| No interest charged on unused credit | |
| No set monthly payments | |
| Personal or business collateral is required to secure the funding. | Collateral is not required to secure funding. |
| Collateral can be seized in the event a borrower defaults on funding | In the event a borrower defaults on funding, your business could be sued by your lender, result in a foreclosure on your assets |
| Low risk to lenders | Higher risk to lenders |
| Provides higher credit limits, lower interest rates | Provides reduced credit limits,higher interest rates |
If you are looking for a substantially higher credit limit, you will have better luck being approved for a secured line of credit, even if you don’t have a high credit score.
If you need help deciding on the best funding option for your business, contact Fast Capital 360 to speak with a Business Advisor.
How Do I Apply for a Small Business Line of Credit?
After you decide whether you would like to proceed with a traditional bank or online lender, click here to get started with the application process.
Depending on the lender you choose, your application could request more or fewer documents.
While banks often require a lengthy vetting and application process before they’re willing to grant a business line of credit, online lenders use more streamlined processes that can provide funds quickly for business owners looking to move fast.
Some documents you may need are:
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Profit and Loss Statement
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Credit Card Processing Statements
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Voided Business Check
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Driver's License
What Are The Different Uses for Business Lines of Credit?
Your line of credit can be used for a variety of purposes, as long as it is business-related. With a line of credit, you are free to use any amount within your limit however you see fit for your business. And, you won’t ever need to worry about having to pay interest on the funds you don’t use. Let’s review a few of the most common uses:
Inventory Financing
Business owners sometimes turn to a business line of credit to help cover inventory expenses during a slow season, or just to stock up on supplies in case of an emergency.
Equipment Funding
For business owners that need to purchase a new piece of equipment or are even looking to upgrade, a business line of credit can be used to finance that cost.
Working Capital
If a company is suffering from a slump, a business line of credit can help cover everyday operational costs to help ease that financial burden.
Business Line of Credit Advantages & Disadvantages
Perhaps the biggest reason to get a small business line of credit is the ability to spend funds, pay it back, and then reuse as needed. This differs from a traditional loan, which is disbursed all at once and requires payment over an agreed amount of time.
However, that flexibility can make a small business line of credit difficult to qualify for, especially for startups with less than one year in operation and lower business revenue.
Depending on the lender, you might also have to re-submit documents and paperwork whenever you want to make a withdrawal from the funds.
If you need short-term funding for an immediate expense or even to prepare for financial emergencies, a small business line of credit could be a good option for you. And it could even help build your credit along the way.
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