Small business lines of credit help small businesses fund day-to-day and unexpected purchases alike. This popular type of funding works similarly to a credit card, but with a higher limit. 

Many lenders, from banks to financial technology companies, offer business lines of credit. Some lenders even offer multiple kinds with different characteristics. With so many options, how do you choose the best business line of credit?

What is a small business line of credit?

A line of credit for businesses has similarities with both term loans and business credit cards. 

Like a business credit card and unlike a term loan, you can withdraw and make payments only on the amount of money you need. Small business lines of credit often have larger limits than a business credit card, sometimes up to $250,000. Secured lines of credit may have even higher limits.

Many lenders offer both term loans and lines of credit. The qualification requirements for both are often similar. For a small business line of credit, you must go through the same application process as you would for a term small business loan.

Is a business line of credit right for you?

A line of credit for your business may be the right choice if you need access to more funds than would be available through your business credit card and you want that funding at a lower interest rate. 

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

How to choose a business line of credit

When choosing a business line of credit, you’ll want to research several financial institutions. You could choose a bank, a credit union or an online lender, such as a fintech.

You’ll want to review each financial institution’s requirements and compare interest rates. 

1. Assess your business’s needs

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

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.

Secured or unsecured: 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 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.

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 why you need the funding, how you’ll use it, 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. 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 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. However, many small business lenders look at your personal credit score instead.

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 fintechs will accept scores in the low 500s.

Other debts and obligations: As with a personal loan, lenders want to determine whether you can afford additional debt. They’ll need to know what other financial obligations you have, including other loans or lines of credit, balances on business credit cards, monthly bills and payroll figures.

3. Compare your options

 As you work on your research, you may want to create a spreadsheet to make it easy to compare your options.

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: What are the minimum and maximum rates the lender charges? Some lenders don’t share this on their websites but will tell you if you call. Others don’t disclose a potential rate until you apply.

Fees: Beyond the interest rate, are there other fees? How much are they?

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. 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 — 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 choose and apply for the best business line of credit for you. Most financial institutions have an online application process, though some brick-and-mortar lenders require an in-person visit or a phone appointment. 

The lender may follow up and request additional documentation after receiving your application. Have all the requested documentation prepared as PDFs. This will make it easier to upload them to the bank’s system.

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. Researching your choices is easier than ever, as many lenders share details about their requirements and loan products on their websites.

FAQs about choosing a small business line of credit

 

  • Banks will consider several factors when making decisions about business lines of credit. Among these are your business and personal financial history, along with your business’s annual revenue, business plan, years in business, industry and other debts.

  • 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.