Key takeaways

  • Lenders offer secured and unsecured lines of credit
  • Lines of credit usually requires one to two years in business and strong annual revenue, similar to term loans
  • Average rates range from 8 percent to 60 percent or higher

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 your business takes research. Be prepared to decide on the type, look up requirements and 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. Interest rates on business lines of credit are usually less than those of a business credit card. But unlike a credit card, interest rates tend to be lower — although 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. Afterward, you will begin repaying the amount you borrowed and can no longer access funds from your line.

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

For newer businesses or business owners who don’t meet traditional lenders’ minimum credit score, bad credit business loans are available. 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 1.1 and 1.5, and is multiplied by the amount you borrow. For instance, a draw of $10,000 with a factor rate of 1.2 will mean your business repays $12,000. This is equivalent to an interest rate between 35 to 36 percent.

Bankrate insight

Getting any type of business financing can be risky. Before signing a loan agreement, make sure you understand the terms, conditions and any risks associated with financing your business.

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.

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 — and by providing collateral, you may score a lower rate. An unsecured line of credit does not require collateral, but you may receive a less competitive offer.

Secured line of credit Unsecured line of credit
Collateral required No collateral required
Less risk for a lender results in lower average rates Higher risk for lenders but less risk for your business
May have access to a higher credit limit Credit limit typically capped at $100,000 for qualified businesses
Eligibility criteria may be less strict with a valuable asset May require more time in business and higher annual revenue

Collateral reduces the risk for lenders, so secured lines of credit may have higher limits and lower interest rates than unsecured lines. Acceptable collateral includes a lien on your business, bank accounts, stocks or certificates of deposit.

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 for unsecured lines of credit.

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 have at least two years in business and an annual revenue of $100,000 or more. 

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

Since they are a common option for businesses, you should be able to find a line of credit from banks, credit unions and online lenders. 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 have to demonstrate your ability to provide collateral. Some lenders may require that owners sign a personal guarantee, regardless of whether the line is secured or unsecured.  

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. Your business line of credit interest rate will depend on the lender and your creditworthiness, but rates could run anywhere from 8 percent to more than 60 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 apply for.
  • Repayment plans. Draw periods — the time a 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. Lenders typically want to see good personal credit and sufficient cash flow to cover repayment.
  • Associated fees. Compare the fees and interest rates with each lender to ensure you’re getting the best possible deal. Draw fees, early payment fees, origination fees and late fees are some of the most common.
  • Special features. Lenders may offer perks, such as credit monitoring services or reporting payments to a credit bureau, that make their loans stand out.

Bankrate insight
To help determine the best lender and line of credit for you, use a business loan calculator. You’ll be able to estimate your payments for different loan options, giving you a clearer idea of what you can afford.

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 longer, but they may be able to offer more competitive rates.

Business line of credit costs and fees

Lenders charge fees and interest on lines of credit, both to open and to use your financing. This is represented by the line’s annual percentage rate (APR) and includes a few common fees:

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

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: Similar to a line of credit, this is a revolving line of credit. You can spend up to your credit limit, which will replenish as you repay it. Business credit cards may come with additional benefits, such as an introductory APR or rewards, and you won’t pay interest if your balance is paid in full.
  • 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.

Bankrate insight
Smaller business loan amounts also exist. Check out our guides on:

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 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

  • You may be able to find a line of credit — or other financing — with a lender that offers startup business loans. You can also consider a personal line of credit for startup expenses, but you’ll need to confirm that the lender has no restrictions on using a personal loan for business.
  • On average, lenders have a minimum time in business requirement of one to two years to qualify for any financing, including lines of credit.
  • It depends on the lender you choose to work with and the type of line of credit your business needs. Secured lines of credit are typically easier to qualify for, but you will still need to prove a strong annual revenue — and have an asset that can be used as collateral.