Business Line of Credit: A Borrower’s Guide

Your business needs consistent cash flow to pay employees, cover costs and invest in projects that will grow your company.

With a business line of credit, you can spend, pay back and reuse capital as needed. Business lines of credit give you the capacity to handle emergencies and opportunities equally, offering the peace of mind and security you need to manage your business best.

A business line of credit is a type of financing that allows you to spend, pay back and reuse capital as you need it. Let’s say you’re approved for a $10,000 business line of credit. You don’t need to use those funds right away. 

If you find you need $1,000 to buy inventory a month after approval, use $1,000 from your $10,000 credit line. You’ll only be charged interest on the $1,000 you borrowed. With a revolving credit line, as you pay back the $1,000, your credit line will increase up to your original $10,000 limit.

Needless to say, a business line of credit is a popular form of financing for many entrepreneurs. So much so that 35% of employer firms surveyed applied for this type of funding, according to the Federal Reserve Banks’ State of Small Business Credit report. Of those applicants, 71% were approved.

A revolving business line of credit works similar to a credit card. The line can be used when needed, and as you pay down your debt, your credit line is replenished up to the original credit limit. The main features that make a small business line of credit attractive are purchase and payment flexibility.

Repayment terms generally fall within a 6-month to 3-year span, and credit limits are typically higher than their credit card counterpart.

Depending on your lender, you may be charged a draw fee on each withdrawal you make, which can cost 1%-2% of the borrowed funds. You may also be charged an annual fee. Withdrawal minimums may also apply. Additionally, if you don’t use your credit line for a period of time, you may be responsible for paying an inactivity fee.

• Average Business Credit Limit

  Small business owners have an average credit limit of $56,100, according to credit scoring agency Experian. The agency arrived at this figure by analyzing a sampling of 2.5 million small businesses. 

While a small business line of credit and a business credit card may seem similar, there are distinct differences between them.

1. Access to Working Capital

The best business line of credit lenders can provide you access to large sums of working capital. For example, through Fast Capital 360, you could obtain a line of credit up to $250,000.

An online business line of credit can provide you with higher limits than you’d get with a business credit card. While it’s also possible to receive a cash advance from your business credit card, you’re typically charged a cash advance fee and a higher interest rate than you’d pay for purchases.

2. Repayment Schedules

While a business credit line is quite flexible, business credit cards provide more leeway when it comes to repayment schedules. There is no set repayment term for a credit card. 

Small business lines of credit, on the other hand, come with a set end date. Borrowers will pay either weekly or monthly installments, often over 6 months to 3 years.

3. Fees and Rewards

Business credit cards usually offer attractive rewards programs that lines of credit don’t. These card perks typically come with an annual fee which recoups the cost of these benefits for the provider. Small business lines of credit don’t feature any rewards programs.

1. Loan Terms and Fund Availability

With a term loan, you’re approved for a specific loan amount that’s given to you all at once. Unlike a business line of credit, interest on your loan begins accruing immediately. Additionally, your funds do not replenish like they do with a business line of credit.

2. Payment Schedules

Once you’re approved for a term loan, you begin making payments right away. With a business line of credit, you make payments as you use your funds.

3. Repayment Periods

Repayment periods for term loans are often longer than you’d find with business lines of credit. For instance, term loans can have repayment periods from 1 year to 25 years, while business line of credit repayment terms can range from 6 months to 10 years.

Business lines of credit can be secured or unsecured and non-revolving or revolving. Let’s compare and contrast the types of business lines of credit to understand the difference.

Secured Business Lines of Credit

Secured business lines of credit require businesses to back the credit line with collateral. 

Collateral for a secured business line of credit is an asset that the lender can assume ownership of and liquidate to pay off the remaining balance in the event of default.

• Collateral for Business Credit Lines

  The most common assets used to secure a business credit line include:

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

Unsecured Business Lines of Credit

Unsecured business lines of credit can be obtained without collateral. This means that if a business defaults on its credit line, the lender would have no pledged securities to leverage to recoup on losses.

However, lenders providing unsecured business lines of credit protect themselves by other means. This is done mostly by reducing credit limits, charging higher business line of credit rates, shortening terms and requiring a personal guarantee commitment.

Because of this, unsecured business lines of credit have their benefits and their drawbacks. On the upside, the application process is streamlined. Applicants seeking an instant business line of credit often receive a decision within hours. Funds are deposited the same day as approval in many cases. On the downside, unsecured business lines of credit typically carry higher overall costs than their secured counterparts.

Revolving vs. Non-Revolving Lines of Credit 

Most business lines of credit are revolving. You can borrow more as you pay down your principal. However, some lines of credit are fixed. In other words, you’re not able to reuse funds once you’ve paid them off. Though not as flexible as a revolving line of credit, fixed credit lines typically offer borrowers lower interest rates and a predictable repayment schedule.

Pros

• Flexible credit line
• Funds can renew as you pay down your debt
• No collateral required in many cases
• No interest charged until you draw funds
• No restrictions on how funds are used

Cons

• Draw and inactivity fees may apply
• Possible withdrawal minimums 
• Shorter repayment terms than business term loans

Your business line of credit interest rate will depend on your business qualifications. Here are some of the factors that affect final costs:

Your Credit History

A personal credit history helps lenders understand how effectively you manage and repay debt, allowing them to better assess your risk. If you’ve struggled with accounts in the past, and are looking for a business line of credit for bad credit, you still have options. Some lenders specialize in bad-credit financing.

Business Characteristics

Your business’s structure, industry and unique attributes can influence your risk score depending on how it affects your earning abilities. In general, the amount you receive, combined with your unique business qualifications, will influence how much you pay to access the business line of credit.

If you want to apply for a business line of credit, you can go through a conventional lender, such as a bank or a credit union or an online lender. Banks often have a lengthy application and underwriting process before they’re willing to grant a commercial line of credit, but they usually offer competitive rates. In contrast, online lenders use more streamlined processes and can provide funds as soon as the next day but charge higher rates. 

Though the application process will vary from provider to provider, be prepared to supply:

• Personal owner details including name(s), address(es), social security number(s) and date(s) of birth
• Company details, including a description of the business and its activities, time in business and revenue
• Past bank statements

What to Consider Before Choosing a Business Line of Credit

Before signing a business line of credit offer, research lenders and carefully review terms and conditions to ensure you’re making the best decision for your business. Take into account:

• Draw Restrictions: Some lenders require borrowers to draw regularly to keep the line active, lock in rates and avoid fees, while others set minimums and maximums on the amount you can remove at any given time.
• Usage Fees: Common line of credit fees include draw, maintenance, origination and annual charges. 
• Repayment Terms: Payment frequency may vary from lender to lender. Some require daily or weekly repayment, whereas others require monthly.

To qualify for an online business line of credit, your business must meet certain requirements regarding time in business, annual revenue and personal credit score.

For example, newer businesses or those with less-than-stellar credit most likely will qualify for short-term unsecured business lines of credit. Businesses with high revenues, established business histories and good credit scores are likely eligible for long-term lines of credit.

The more established your business and the stronger your credit score, the easier it will be to qualify for a program.

• Fast Capital 360 brings together some of the best business line of credit lenders through one straightforward application.

  Applying is fast, easy — and most importantly — won’t impact your credit.

  Learn More