Business Line of Credit: How It Works & Best Options (2024)

What is a business line of credit?

Unlike a traditional small-business loan — where you receive a lump sum of capital and repay it over a specific period of time, with interest — a business line of credit is a more flexible form of financing.

With a line of credit, you receive access to a set amount of capital — say, $150,000 — and can draw funds as needed. You only pay interest on the funds that you draw. You then repay the funds over time, typically on a weekly or monthly schedule.

You can continue to draw on your business credit line as often as you’d like, as long as you make payments on time and don’t exceed your credit limit.

How does a business line of credit work?

Business lines of credit are available from banks, credit unions and online lenders. Although funding amounts and repayment terms vary, lines of credit typically have lower maximums and shorter terms compared to traditional business term loans.

Secured vs. unsecured business lines of credit

A secured business line of credit requires you to put up assets such as inventory or property as collateral. If you fail to pay back the credit line, your lender could seize your assets. Unsecured business lines of credit, on the other hand, don’t require collateral, but some lenders may still require a personal guarantee or a lien on your business’s assets.

A personal guarantee gives a lender the right to go after your personal assets, like your house, if you default on a loan. A UCC lien is similar; a lender can seize your business assets if you haven’t repaid a loan.

When comparing lenders, ask whether they require collateral, a personal guarantee or a lien so that you can find the option that’s best for your business.

Business line of credit vs. credit card

Business credit cards are technically lines of credit, but they differ from traditional business lines of credit in several ways:

Overall, business credit cards tend to work best for smaller ongoing expenses and for newer businesses without established finances, while business lines of credit work best for larger ongoing expenses and more mature businesses.

Business line of credit rates and fees

Current business line of credit rates can range from 10% to 99% APR. The interest rate you receive will vary based on your lender, credit score, financial history and time in business, among other factors.

In general, the stronger your credentials, the lower interest rates you’ll receive. Banks tend to offer more competitive business line of credit rates compared to online lenders.

Depending on your lender, you may also have to pay fees on your line of credit, such as:

Where to get a business line of credit

Banks and credit unions

Banks and credit unions can offer different types of business credit lines, including secured and unsecured business lines of credit, as well as SBA lines of credit.

Although these lenders can offer business lines of credit with competitive interest rates, you’ll typically need to meet strict requirements to qualify. You’ll likely need to have strong revenue, good credit and several years in business.

Compared to online lenders, banks and credit unions can also be more likely to require physical collateral to secure your credit line (especially for larger limits), as well as more likely to charge additional fees, including annual and inactivity fees.

Online lenders

Online lenders, like Headway Capital and Fundbox, generally have more flexible business line of credit requirements compared to banks and credit unions. Some online lenders will work with startups or businesses with bad credit.

Online lenders typically have streamlined application processes and fewer fees, and may be able to issue small-business lines of credit in a matter of days. However, these lenders are also likely to charge higher interest rates than banks and may have lower credit limits.

How to get a business line of credit

To get a business line of credit, you can follow these steps:

1. Evaluate your financing needs

You’ll initially want to determine why you need funding and how quickly you need it. If you’re looking for a working capital line of credit to cover payroll, for example, you may need financing as quickly as possible. On the other hand, if you want to keep a line of credit in your back pocket as an emergency fund, you may not be in such a rush.

It's also important to determine how much capital you can afford. You can use a business line of credit calculator to estimate potential payments and interest costs.

2. Review business line of credit requirements

Next, you'll want to evaluate your business's credentials — time in business, annual revenue, personal credit score — to determine what lines of credit you can qualify for.

Traditional lenders, like banks and credit unions, will likely have stricter qualifications, requiring multiple years in business and a strong credit history. Online lenders can be more lenient and some may be willing to work with startups and/or borrowers with bad credit.

At a minimum, therefore, you’ll want to be able to meet these business line of credit requirements:

If you’re looking for a secured business line of credit, you should also make sure you know what assets you’re going to put up as collateral and how much they’re worth.

3. Research and compare lenders

Once you have a better understanding of your financing needs and qualifications, you can research and compare small-business lenders to find the right option for your company.

Ultimately, you can apply for a business line of credit through a bank, credit union, online lender, or even work with an online marketplace to submit a single application and compare offers from multiple lenders at the same time.

Interest rates, borrowing limits and qualifications can vary by lender.

4. Gather required documents and apply

As part of your application, lenders will typically consider your credit and financial history — and ask you to provide documentation, such as:

You may also be required to provide physical collateral or sign a personal guarantee.

Depending on your lender, it may take anywhere from 24 hours to several weeks to complete the application and underwriting process.

5. Review your loan agreement and get funds

Once you’ve been approved, your lender will send you a business line of credit agreement to review and sign. You’ll want to review it thoroughly to make sure you understand all of the terms and conditions.

You might ask a business advisor or attorney to look over the document as well. If you have any questions or concerns, you should reach out to your lender for clarification before signing.

After you’ve signed the loan agreement, you’ll be able to draw on your credit line as needed. Your lender may require you to make a minimum draw amount, $1,000, for example, so keep this in mind as you anticipate your financial needs.

Business line of credit calculator