Are you looking for working capital financing for your small business? A small business line of credit may be a good solution. Similar to a credit card, businesses can access their line of credit when needed and only need to pay interest on the amount taken out. 

Business lines of credit are available from both traditional and online lenders, and choosing the right one for you takes research. Be prepared to decide on the type, look up requirements and gather business documents ahead of 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, only needing to pay accrued interest on the amount taken out. Interest rates on business lines of credit are usually less than those of a business credit card.

There are two types of business lines of credit: secured and unsecured. Secured lines of credit use an asset owned by the company as a guarantee for the loan, while unsecured lines of credit do not require collateral.

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 $250,000 — you’ll need to research and apply for the right loan.

1. Decide between a secured and unsecured line of credit.

There are two types of business lines of credit: secured and unsecured. Both serve the same purpose, but each has different requirements.

Secured business line of credit

This type of loan requires the small business owner to provide an asset to secure the loan. If the business owner defaults on the loan, the provider can take possession of the asset. Because collateral reduces the risk for lenders, secured lines of credit may have higher limits and lower interest rates than unsecured liens. You may also be able to qualify for a secured line of credit with less time in business or a lower credit score than an unsecured line requires.

Acceptable collateral includes a lien on your business, bank accounts, stocks or certificates of deposit.

Unsecured business line of credit

Unsecured lines of credit are not secured with an asset. These lines of credit are often capped at about $100,000. For loans greater than $100,000, you will likely need to secure it.

Because the risk is higher, lenders typically require a higher credit score — in the mid-600s or above — and a higher annual revenue for unsecured lines of credit.  Lenders may charge higher interest rates.

2. Research lenders’ requirements for getting a business line of credit

While all lenders set their own business loan requirements, most lenders will require your small business to meet the following criteria:

  • Your small business must have been under current ownership for a fixed amount of time, typically two or more years.
  • Your small business must meet a minimum annual or monthly business revenue, typically at least $50,000 per year.

Lenders also consider factors such as your personal or business credit scores, business financials, time in business, annual revenue and industry. These factors help them assess the risk you pose as a borrower.

If you’re unsure if you meet a particular lender’s requirements, see if they have a prequalification or preapproval tool you can use. Otherwise, reach out to their customer service team for more information. 

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.

If you’re applying for a secured loan, you’ll also need to demonstrate your ability to provide collateral.

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 rates to be sure you’re getting the best option. The interest rate you’ll pay on a business line of credit will depend on the lender and your creditworthiness, but rates could run anywhere from 5 percent to more than 30 percent.

Other considerations 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 hope to secure.
  • Repayment plans. Draw periods — the time for which the line of credit remains open — and repayment periods vary. Pay attention to what each lender offers and choose the one that best suits your business needs.
  • Requirements. It’s important to look at the requirements to be sure your business can meet them.
  • Associated fees. Compare the fees and interest rates with each lender to ensure you’re getting the best possible deal.
  • Special features. Lenders may offer perks, such as credit monitoring services or reporting payments to a credit bureau, that make their loans stand out.

Use a business loan calculator to estimate your payments for different loan options.

5. Apply for a business line of credit

Once you’ve identified a lender, you can apply for a loan online, over the phone or in person, depending on the lender. 

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

Business line of credit costs and fees

Lenders charge fees to open and use a business line of credit. All lenders will charge an annual percentage rate, a percentage that represents the loan’s interest plus fees. Other fees vary from lender to lender. These are common ones you may encounter.

  • 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.
  • 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 pay off your loan early. This fee is less common with lines of credit than with other types of business loans.

The bottom line

A small business line of credit is a great loan option for businesses. Companies can access their line of credit when needed and only need to pay accrued interest on the amount taken out.

Business lines of credit come with associated costs and fees. Consider the cost — plus other features the lenders offer — before applying to ensure that this loan is the right fit for your company.