How to get a business line of credit

A small business line of credit can help your business fund short-term expenses, putting working capital back into your business that you can use for operational costs. Similar to a credit card, businesses can access their line of credit when needed and only pay interest on the amount taken out.

But getting a business line of credit involves understanding how a line of credit works and what to look for when researching lenders. Be prepared to research each lender’s repayment terms, interest rates and requirements to be eligible as well as gather business documents before applying.

What is a business line of credit?

A line of credit functions like a credit card. Companies can access their line of credit when needed and only pay accrued interest on the amount taken out. As you repay the loan, the line of credit will replenish the available credit limit, allowing you to take out new loans as needed. Interest rates on business lines of credit are usually less than those of a business credit card. But unlike a credit card, you won’t have access to reward programs that come with many cards.

Business lines of credit are designed for managing cash flow and can be a good option for frequent, smaller expenses. You can continue to withdraw funds and repay what you borrow through the draw period, which may last one to five years. After you withdraw funds, you will then have a set timeline to repay the funds, such as six or 18 months.

There are two types of business lines of credit: secured and unsecured. They have their own benefits and drawbacks, but the best choice largely depends on the assets your business has access to.

High-risk lines of credit

Bad credit business lines of credit are available for new businesses or business owners who don’t meet traditional lenders’ eligibility requirements. Lenders like OnDeck accept fair credit, but you will face significantly higher interest rates.

And instead of interest, some lenders may use factor rates to determine the cost of each draw. This is represented as a decimal, usually between 1.10 and 1.50, and is multiplied by the amount you borrow.

For instance, a draw of $10,000 with a factor rate of 1.20 will mean your business repays $12,000. This is equivalent to an interest rate between 35 to 36 percent.

5 steps to get a business line of credit

After you determine how much funding you need — keeping in mind that lines of credit range from about $1,000 to over $1 million — you’ll need to research and apply for the right loan. Let’s look at the steps for how to get a business line of credit.

1. Decide between a secured and unsecured line of credit

Both secured and unsecured lines of credit can benefit a business. A secured line of credit is useful for business owners with valuable assets or business owners with less-than-ideal credit. By providing collateral, you may score a lower interest rate than you would get with an unsecured line of credit.

By providing collateral, you may score a lower interest rate than you would get with an unsecured line of credit. That’s because the collateral lowers the risk of offering a business loan to your business. You may also be more likely to get approved for a loan with bad credit than with an unsecured line.

Because the risk is higher on an unsecured line of credit, lenders typically require a higher credit score — in the mid-600s or above — and a higher annual revenue.

The differences between secured and unsecured lines of credit:

2. RResearch business line of credit requirements.

All lenders set their own requirements for opening a new business line of credit, some more lenient than others. You’ll want to review the information the lender provides on its website or through representatives before you spend time applying for the loan.

Common areas that lenders look at when setting requirements include:

• Years in business: Most lenders want to see one to two years in business, though some fintech lenders will allow six months in business.
• Revenue and cash flow: Lenders want to see that you have a healthy flow of revenue and that you can handle making debt repayments. Lenders often set a minimum annual revenue, such as $100,000 to $250,000.
• Business and personal credit score: A business can have a business credit score showing how the business handles its finances, much like a personal credit score. Lenders may set a minimum business credit score that you must meet to be eligible. Many lenders also look at your personal credit score, often set at 600 or higher depending on the lender. Some online lenders accept a personal credit score of 500.
• Industry: Lenders may exclude some industries from getting a business loan, such as businesses in the cannabis industry. They may also tighten requirements or disqualify businesses in industries with a high failure rate, such as restaurants.
• Business plan: Some lenders may want to see your expected trajectory of growth through your business plan, including your forecasted revenue, marketing and goals. This helps them understand how you’ll handle paying back the business line of credit when you use your available credit.

3. Gather the required information

Your small business lender will likely want to see general information about the business, its owners and its finances. They’ll also want to know the loan amount you’re pursuing.

Required documents often include:

• Business licenses
• Articles of incorporation
• Personal and business bank statements
• Profit and loss statements
• Business plan
• Personal and business tax returns
• Information about other debt obligations

If you’re applying for a secured loan, you’ll also have to demonstrate your ability to provide collateral. Some lenders may require that owners sign a personal guarantee, which guarantees the loan with your personal assets.

4. Select a lender

Multiple types of lenders offer business lines of credit, including traditional banks, credit unions and online lenders. Online lenders and credit unions often have more flexible qualification requirements than traditional banks.

Before selecting a lender, it’s important to research potential lenders and compare features to be sure you’re getting the best option. Features to compare include:

• Maximum credit limits. The maximum amount you can borrow will depend on the lender, your credit score and the type of business line you apply for. The lender will set the maximum amount that it will lend to you during the application process.
• Draw periods. Be sure that you understand the terms of your line of credit, such as how long the available credit will remain open for you to withdraw funds.
• Repayment terms. Pay attention to how long you have to repay the loan once you withdraw funds. Repayment terms are typically short, such as six to 24 months.
• Requirements. It’s important to look at the business line of credit requirements to be sure your business can meet them. Lenders typically want to see good personal credit and sufficient cash flow to cover repayment.
• Interest rates. Your business line of credit interest rate will depend on the lender and your creditworthiness. Typical rates could run anywhere from 8 percent to more than 60 percent.
• Associated fees. Compare the fees with each lender to ensure you’re getting the best possible deal. For example, some lines of credit charge a draw fee each time you withdraw funds.
• Reporting to credit bureaus. Most business lines of credit will report to the credit bureaus, helping you build business credit. But look in the fine print to be sure since some lenders may not report your payments.

5. Apply for a business line of credit

Once you’ve identified a lender that offers the type of line of credit you need, you can apply online, over the phone or in person, depending on their application requirements.

Make sure you’ve provided all the required documents. Also, confirm the details and numbers you’ve gathered before submitting.

If you work with an alternative lender, you may receive an approval decision and funding within a few days. Banks and credit unions tend to take a few days or weeks, but they may be able to offer more competitive rates.

Business line of credit costs and fees

When getting a business line of credit, lenders charge fees and interest, both to open and to use your financing. A few common fees to watch for include:

• Draw fee. Many lenders charge a draw fee each time you tap into your line of credit, which could be anywhere from 1 percent to 4 percent of the amount you withdraw.
• Origination fee. Some lines of credit charge a fee for opening the credit line with the lender. This fee typically costs 1 percent to 3 percent of the principal loan amount.
• Payment processing fee. Some lenders charge a payment processing fee for the convenience of paying your bill online.
• Wire transfer fee. This fee, typically around $15, is charged each time you wire funds to your account.
• Late fee. If you miss a payment, you may be charged a late fee.
• Prepayment penalty. You may be charged a prepayment penalty if you repay your loan early. This fee is less common with lines of credit than with other types of business loans.

Is a business line of credit right for you?

You might get a business line of credit if:

• You don’t need to borrow large amounts of money
• You expect to make small, short-term purchases
• You need regular access to credit to draw from when needed
• You don’t qualify for a conventional term loan

You could also choose to prequalify for a business line of credit and other loan types to see which loan offers you the best interest rates and terms. Prequalification allows you to see the loan offer without performing a hard check against your credit and impacting your credit score.

Alternatives to business lines of credit

If you decide a business line of credit isn’t for you, or you want to explore other ways to finance your business, consider these options:

• Business credit card: If you need to make a large, one-time purchase, you may opt for a business term loan. This loan will offer you a lump sum up front that you then repay over a specific period of time with interest and fees.
• Grants: Although competitive, grants are a great debt-free way to finance a business. Grants are available from federal, state and local organizations and don’t have to be repaid.
• Crowdfunding: These campaigns often offer rewards — such as products or gifts — in exchange for funds to help grow a business. While donation and reward-based options are the most popular, equity-based crowdfunding also exists. Most businesses will use a crowdfunding platform or service to run campaigns.

Bottom line

Getting a business line of credit is a great loan option for businesses. Companies can access their line of credit when needed and only pay accrued interest on the amount they use.

As with any financing, business lines of credit have associated costs and fees. Consider the cost — plus other features the lenders offer — before applying to ensure that the line of credit you choose is the right fit for your business.

Frequently asked questions

• Can you get a line of credit to start a business?

  You may be able to find a line of credit — or other financing — with a lender that offers startup business loans. In general, most lines of credit require you to be in business for six months to a year or more.

• How long do you need to be in business to get a line of credit?

  On average, lenders have a minimum time in business requirement of six months to two years to qualify for any financing, including lines of credit.

• Is it hard to get a business line of credit?

  Business lines of credit tend to be easier to qualify for than other types of business loans. But it depends on the lender you choose to work with and the type of line of credit your business needs. Online lenders and secured lines of credit are typically easier to qualify for.