How to choose the best business line of credit

Business lines of credit (BLoCs) help small businesses fund short-term, working capital expenses. But different lenders incorporate different fees and features, making their lines of credit more or less useful. For example, some lines of credit charge fees each time you draw money for a loan, which can add up if you plan to make regular draws.

If your company needs this type of financing, you’ll want to consider the credit limit you qualify for, frequency of draws and the timeline you have to repay. Let’s look in depth at these features and more to help your business choose the best business line of credit.

What is a small business line of credit?

A business line of credit is similar to a business credit card. You can withdraw money and make payments only on the amount you use. But business lines of credit can come with larger limits, up to $250,000 or more, especially with traditional lenders or secured lines of credit.

Some lenders lower their qualification requirements for business lines of credit compared to other loans.

For example, Bank of America offers a cash-secured business line of credit that accepts startups with $50,000 in annual revenue. Its unsecured term loan requires two years in business and $100,000 in annual revenue.

Is a business line of credit right for you?

A line of credit may benefit your business if you need access to more funds than would be available through your business credit card.

It may also be a good choice if you want access to funds on an as-needed basis, as opposed to borrowing a large sum of money at one time, as you would with a standard term loan.

Types of business lines of credit

When choosing the best business line of credit for you, consider whether a secured or unsecured line of credit would make the most sense. Here’s how they compare:

• A secured business line of credit: With this type of business line of credit, you put up collateral, like inventory or equipment, for the line of credit. Securing the line lowers the risk to the lender, leading to more favorable interest rates and repayment terms. But if you fail to repay what you draw from that line, the lender can seize those assets.
• An unsecured business line of credit: This option helps you get a line of credit without as much risk to your business assets. But to qualify for an unsecured line of credit, you’ll need a stronger borrower profile to get approved (a higher credit score, more time in business with consistent revenue). Choosing an unsecured business line of credit could mean paying more in interest and getting a lower credit limit.

How to choose a business line of credit

When choosing a small business line of credit, you’ll want to research several financial institutions. You may base your decision on each lender’s requirements from a bank, a credit union or an online lender.

Let’s look at the steps you can take to find the best small business line of credit.

1. Assess your business’s needs

To narrow down your options, think about what your business needs and whether lenders’ offerings match up. Specifically, evaluate:

• Line amount: Determine how much money you’d like to have available in your line of credit. Some banks offer business lines of credit up to $250,000, while for others, the maximum limit is $2 million.
• Draw frequency: Decide how often you need to draw from your line of credit. Some lenders have restrictions, allowing a set number of draws per month or quarter. If, for example, you may use your line of credit for payroll, you’ll need a financial institution that allows one or two draws per month.
• BLoC type: Are you able to secure your line of credit with collateral? If so, you might not only qualify for a higher amount but also at a lower interest rate. If you prefer not to put up collateral and want an unsecured line of credit, you may have a higher interest rate and qualify for a lower amount.

2. Research lender requirements

Each financial institution has its own requirements. Review publicly available information and see if your business meets the requirements before spending time preparing an application.

Remember that if you fall short in one category, exceeding the requirement in another could make up for it in a lender’s eyes. Generally, when extending a line of credit for a business, lenders want to see a solid mix of:

• Annual revenue: Most lenders have a minimum amount of annual revenue a business must earn to be eligible for a line of credit. The amount varies by institution — it could be under $50,000 or over $400,000. Individual lenders may have different requirements for their secured or unsecured line of credit.
• Business plan: Some lenders require a business plan. In it, you’ll outline what your business does and how it makes money. You may also need to include a loan proposal.
• Loan proposal: Some banks require a proposal in which you detail how you’ll use the business line of credit, how it will benefit your business and how you’ll pay it back.
• Years in business: Lenders want to know how long a business has been operating. Time in business indicates stability. It could affect both the amount of funding you can receive on your line of credit and your interest rate. Minimum requirements typically range between six months and two years.
• Industry: Many lenders place restrictions on the industries to which they’ll lend. For example, companies in the cannabis industry will likely be unable to secure a line of credit. Companies in industries with high failure rates — restaurants, for example — may see higher interest rates.
• Business and personal credit score: Like individuals, businesses also have credit scores. You may need to meet a set minimum business credit score, especially if you’re pursuing a large loan amount. Many small business lenders look at your personal credit score, too.
• Personal financial history:Whether you have good or poor credit could affect your approval for a business line of credit and the interest rate you receive. Credit score requirements are often in the mid-600s, though some fintech-based online lenders will accept scores in the low 500s.
• Other debts and obligations:Lenders want to determine whether you can afford the loan payments. They’ll need to know what other financial obligations you have, including other business debt, balances on business credit cards or monthly bills.

3. Compare your options

As you research different small business lines of credit, you may want to create a spreadsheet to make it easy to compare your options. You may look at:

• Maximum credit limit: What is the highest funding amount available for your line of credit? Note that you may not qualify for the maximum amount, especially if you have fair or bad credit.
• Interest rate: Check the minimum and maximum interest rates the lender charges for its business line of credit. You can look either on the website or call to ask a loan specialist if it’s not disclosed.
• Fees: Beyond interest rate, there are other fees that may add to the total borrowing cost of a business line of credit. For example, some lines of credit charge monthly maintenance fees or draw fees each time you withdraw money from the credit line. Others charge an origination fee, which could be 1 to 5 percent of the principal loan amount.
• Payment reporting: Does this institution report your payments to the credit bureaus? This may be particularly important for younger businesses needing to build their business credit scores.
• Draw period length: How long will you be able to withdraw funds? Can you renew the line after it expires?
• Repayment terms: During the draw period, are you required to make payments on the principal? Or just the interest? Depending on your cash flow, this could be a major factor.

4. Prequalify, if possible

Some lenders offer you the opportunity to prequalify. As you figure out how to choose a BLoC that will work for your business, prequalifying is a smart move. It requires only a soft credit check, so prequalifying with multiple lenders won’t impact your credit score.

Plus, it gives you a way to see what rates you qualify for with different lenders. That way, you can pick the lowest rate or use it as leverage to negotiate with your preferred lender.

5. Apply for the best business line of credit

Once you’ve completed your research, it’s time to apply for the best line of credit for your business. Most financial institutions have an online application process, though some brick-and-mortar lenders require an in-person visit or a phone appointment.

Every lender requires specific documentation to show your credit and financial history, although some will have more requirements than others. Those documents may include:

• Personal and business bank statements
• Personal and business tax returns
• Profit and loss statements
• Proof of business formation
• Business plan

The lender may follow up and request additional documentation after receiving your application.

The bottom line

A small business line of credit can be a great tool to improve your cash flow and grow your business. 

Like most major business decisions, you should approach choosing a business line of credit methodically. As you learn how to choose a BLoC, researching your choices is easier than ever, as many lenders share details about their requirements and loan products on their websites.

Frequently asked questions

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  What qualifies you for a business line of credit?

  Before issuing a line of credit for a business, lenders will consider several factors. Specifically, financing institutions usually want to see that you’ve been in business for at least a year, have a decent business or personal credit score (in the mid-600s for personal scores) and have consistent annual revenue of $100,000 or more.
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  Is it hard to get a line of credit for a new business?

  Traditional banks often require at least two years in business for their lending products. However, some lenders — including fintechs and a few banks — work with startups. These lenders may require more information about your personal finances. They also may approve a smaller amount at a higher interest rate or require you to provide collateral.
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  What are the types of business lines of credit?

  Business lines of credit (BLoCs) can be secured (meaning you put up tangible assets as collateral) or unsecured. Opting for an unsecured line of credit can protect assets against the risk of seizure if you default, but it usually means a higher interest rate and lower credit limit.