A small business line of credit (LOC) allows you to draw against a predetermined credit limit, as you need it, instead of receiving the full loan amount at one time. The advantage of a business credit line is that you only pay interest on the funds you actually draw. That means you’re not stuck paying interest on capital you don’t have an immediate use for.
Commercial lines of credit are revolving accounts. So, unlike a term loan, as you pay down the balance on your line of credit you increase the amount available to draw in the future. In this article, we will discuss:
- Small Business Line of Credit at a Glance
- Where to Get a Small Business Line of Credit
- Small Business Line of Credit: Banks vs Online Lenders
- Applying for a Business Line of Credit: Banks vs Online Lenders
- When to Apply for a Small Business Line of Credit
- What to Use a Small Business Line of Credit For
- How to Qualify for a Small Business Line of Credit
OnDeck, who has generously sponsored this article, can help you get a business line of credit quick. If you need a commercial line of credit fast, have $75k+ in annual revenues, been in business for 9+ months, and have a credit score above 600, then you may qualify for a small business line of credit with OnDeck. OnDeck approves lines of credit up to $100,000, and you can apply in minutes.
Small Business Line of Credit at a Glance
A small business credit line allows you to draw funds when you actually need them. This means you’re not stuck paying interest on borrowed money if you don’t have an immediate need for it. Once a credit line is established, drawing funds is usually the fastest way to access capital (aside from accessing your own cash). Because a small business line of credit can be such an affordable and convenient source of capital, they have become very common tools for small business owners.
Lines of Credit are Common Among Small Businesses
Not only do 47% of small businesses have a line of credit, but 28% of small businesses are relying on borrowed funds on a regular basis. And this might be significantly underestimating the degree to which small businesses rely on short term borrowing. For example, 60% of small businesses rely on trade credit (credit given to them by their partners or suppliers, like net-30 payment terms). With these figures in mind, it becomes clear how essential a small business line of credit might be.
Where to Get a Small Business Line of Credit
A small business line of credit can be obtained from traditional lenders, like a national bank or regional credit union, and from online lenders. When searching for the right provider for your small business, ask yourself these four questions:
1. How much capital do I need?
Credit lines typically have smaller borrowing limits than term loans which make them ideal for unexpected charges but not for large capital investments.
2. How soon do I need it?
Short term loans are generally quicker to obtain from scratch, but drawing from an established line of credit is even faster.
3. Do I meet the minimum requirements?
Banks have high minimum qualifications and often require specific collateral. Online providers can be far more flexible.
4. How much am I willing to pay?
Banks offer more affordable credit lines than online providers, but when used for high-ROI opportunities, online LOCs can also be a great option.
In general only the best borrowers with the most established small businesses will be able to get business line from a traditional lender like a bank. The faster, more readily available lines of credit are issued by a growing number of online lenders. Here’s a look at which choice might be best for you.
Business Line of Credit Requirements: Traditional Banks vs Online Lenders
|Traditional Banks||Online Lenders|
|Lenders||Visit your local bank||Visit OnDeck|
|Credit Score||680+ (Check yours for free here)||600+ (Check yours for free here)|
|Time in Business||2+ Years||9+ Months|
|Revenue Required||$10k+ in average monthly revenues (trending upward)||$75k in annual revenues|
|Collateral||Ability to pledge short term or hard assets||Ability to pledge short term assets (like receivables)|
May take a 2nd position to a traditional bank
|Credit Line Amounts||$10k - $100k||Up to $100k|
Now that we have a snapshot of the small business line of credit details, let’s compare the two different types of lenders in greater detail.
Small Business Line of Credit: Banks vs Online Lenders
While most lenders will base their lending decision on the five factors listed in the above table, the exact qualifications you must meet, and the terms that accompany a line of credit, will vary widely. The biggest differences are in how banks and online lenders vary in their approach to small business line of credit products.
Banks have higher minimum qualifications but are more affordable than online lenders. Online lenders provide quicker access to capital, and approve some businesses that may not qualify for a bank line of credit. Let’s look at these differences in more detail.
Business Lines of Credit with Banks
Even those small businesses that meet high qualifications for a top-tier business line of credit at a bank might find it difficult to obtain unless they bring other business or accounts with them. Because credit lines are less predictably profitable (compared to a term loan, for example) banks can be reluctant to offer them as a stand alone product.
Lenders that participate in the SBA 7(a) loan program may also offer SBA CAPLines credit lines which have limits of $5 million, but have high qualification requirements. For more information, read our in-depth article on CAPLines.
Qualifying for a top tier business line of credit at a bank or through the SBA’s CAPLines program will typically mean demonstrating to a lender that you have:
- Credit score of 680+ (check your score here for free)
- 2+ years in business
- $10k+ in average monthly revenues (trending positive)
- Ability to pledge short-term or hard assets
- No recent bankruptcies, foreclosures, or tax liens
Traditional banks often have business credit lines with limits from $10k – $100k. Some lenders will have higher limits, but those are often reserved for only the best borrowers and need to be backed by significant collateral.
Traditional lenders typically offer the most competitive interest rates, somewhere around 5% – 13%, on their line of credit products. However, they will also have the highest requirements when it comes to time in business, annual revenues, and credit scores.
The reason banks are willing to provide larger lines of credit at lower interest rates is because bank LOCs are typically secured by collateral. Quincy Miller, head of Small Business Banking at Citizens Bank, says a line of credit can be secured by real estate, equipment, or other business assets. Some banks will let you use your business savings or checking account as collateral as long as you maintain a certain amount of funds in that account.
Banks typically will not want to take a 2nd position on any of your collateral. Generally the bank will want you to refinance any outstanding loans you currently have through a new term loan with them. For example, if you currently have a $5,000 equipment loan then Bank1 will not want to move forward with a LOC until you have refinanced the equipment loan through a new term loan with Bank1. This allows Bank1 to have a 1st position on 100% of your assets, which is very important to most banks.
The application process with a traditional lender can be lengthy. Most still have pretty old-school underwriting procedures and a relatively risk-averse culture. Getting approved for a small business LOC with a traditional lender can easily take weeks, and many trips to the bank.
Establishing a business line of credit with a bank can be limiting in some ways. It can have an impact on your ability to work with multiple financing partners both now and in the future. If you just want a quick line of credit to meet your needs then you may not be up for the process, requirements, and restrictions that a business line of credit from a bank comes with, even if it is cheaper.
Business Lines of Credit with Online Lenders
With small business lines of credit from traditional banks difficult to come by, it’s fortunate that so many online lenders have stepped in to meet the demand. These alternative lines of credit are typically more expensive, but might be a good fit for a borrower that can’t meet the bank’s qualifications or wants more flexibility.
To qualify for a commercial line of credit from an alternative online lender, you’ll typically need to show that you have:
- Credit score 600+ (check yours for free here)
- 6+ months in business
- $2.5k in average monthly revenues
- Ability to pledge short-term assets (like accounts receivable)
- No recent bankruptcies, foreclosures, or tax liens
Most alternative lenders will start qualified borrowers out on conservative credit lines, meaning they might set a lower limit or have a higher-frequency repayment schedule. As the lender becomes more familiar and comfortable with your payment history, you will likely be able to get a higher limit and a more standard repayment schedule.
APRs for most credit line products from alternative lenders are around 20% – 40%.
Note: These costs are similar to what you pay with a small business credit card, but with a business line of credit you get access to cash you can put in the bank. Some expenses or cash flow needs that come up will not let you pay with a credit card. Having credit you can turn into cash is an advantage because you can use it to make any unexpected payments.
Alternative lenders typically don’t require specific collateral for a line of credit, but they usually do place a blanket lien on business assets. This can make it hard to get additional loans or credit lines while you’re paying off existing ones, unless you’re willing to refinance and consolidate the debt.
Online lenders have leveraged new technologies to provide small business LOCs faster and with less paperwork. While some have the ability to provide credit limits as high as $500k, most of the credit lines range from $5k -$100k. Qualified applicants are usually funded in just a few days.
If you are a stronger borrower, do not need the funds immediately, and can be approved through a bank then that is likely the best option for you. However, if you do not meet the bank’s qualifications, or if you need funding very quickly, then you should consider OnDeck as a good alternative solution.
Example: Small Business Line of Credit with OnDeck
OnDeck offers a line of credit product that can help your short term needs, or provide you capital for the future when you might need it quickly. It is generally used for situations like managing your accounts receivable gaps, taking advantage of new growth opportunities, or quickly managing unexpected expenses.
OnDeck Small Business Line of Credit Details
OnDeck offers a line of credit of up to $100,000 with qualifications that are easier than a traditional bank line of credit. You can get approved and have access to capital as quick as 1 business day. Below are OnDeck’s qualifications and features.
|OnDeck Business Line of Credit Details at a Glance|
|Time in Business||9+ months|
|Revenue Required||$75,000 per year|
|APR||13.99% - 39.9%|
|Maintenance Fees||$20 per month |
(waived for 6 months if you draw $5,000+in the first 5 days of opening your account)
|Repayment Terms||6 months|
There are two things you should be aware of relating to the OnDeck terms in the table above:
- The LOC limit is capped at 10-15% of your gross revenue. For example, if your annual revenue is $100,000, then you will only be approved for a business line of credit that is between $10,000 – $15,000. OnDeck does this because they want to make sure you will be able to make any payments on the money you draw. They also want to help you set your business up for long term success and are sensitive to the effects overborrowing can have on your future.
- The repayment terms are 6 month terms, but you can draw against the line again before repaying the loan completely. If you borrow again before full repayment then your 6 month window to pay off the line of credit starts over. For example, if you draw $5,000 from your credit line on January 1st then you have 6 months from that date to pay it all back. However, if you draw another $5,000 on March 1st then you have 6 months from that date to pay back the entire balance. This includes whatever you have not paid from the original $5,000 draw on January 1st, and payments are re-amortized over the next 6 months.
Applying for a Business Line of Credit: Banks vs Online Lenders
While a business line of credit from a bank can be cheaper, it is not necessarily the easier process. When you apply for a business line of credit through a bank you will have to provide a lot of documentation (full tax returns on you and your business, business P&L statement, projected financials, any current leases, etc..) that aren’t generally required from an online lender.
Banks typically have many layers of approvals that your line of credit will go through before you can gain access to funds. It is also likely that you will be pitched many different products while going through their approval process. Both of these attributes can be very frustrating to you when you are trying to get a business line of credit quickly.
Applying for a business line of credit with an online lender, like OnDeck, can be done within minutes and you can have money in your bank account within a few days. You can do the entire process online, at your convenience.
Here is a step-by-step example of how easy it can be to complete an online application:
Step 1 – Enter some basic information about how much money you need and what you need it for.
Step 2 – Enter some basic information about you and your business.
Step 3 – Connect OnDeck to your online bank statements so they can evaluate your ability to make loan payments.
That’s it! OnDeck will analyze your information to determine your eligibility. You should receive an answer within 1-2 business days and get access to capital quickly.
OnDeck Mobile App Features
Small business owners need flexibility when trying to manage a business today. You are not always at your desk, and might need access to capital while on the go. OnDeck has a mobile app that makes the management of your line of credit very easy.
Directly from the app you can view your current balances, make a payment, or make a draw on your line of credit. You have no restrictions on the amount of times you can draw on your line from the app, and there are no draw fees.
OnDeck’s app is a great tool that helps you focus on using your line of credit capital to meet the needs of your business instead of being consumed with the administrative process of making a simple draw.
When to Apply for a Small Business Line of Credit
There are better and worse times to apply for a small business line of credit. Applying at the right time can position you to be approved for a larger limit, low interest rate, and more comfortable repayment schedule. Following these four rules will help you get the best possible line of credit available to you:
1. Apply when your credit score is as strong as possible
Check your credit and make sure it’s looking as good as it can be. If something is being misreported, dispute it and apply for the line of credit once the dispute is resolved. If you need to pay down some revolving debt to improve your score, do so. You can check your credit score here for free.
2. Apply while revenues are up
You want a lender to see why they should want to lend you money, not why you need a loan. Putting your best foot forward means applying for the line of credit when revenues are up and you aren’t desperate for financing. Since you’re not paying interest until you draw on the line of credit, applying for the line before the funds are needed is a no-brainer.
3. Apply for upgraded credit lines after milestones
Lenders set benchmarks for credit scores, gross revenues, and time in business. If you hit a new benchmark, like making it to the 2-year mark as a business or boosting your credit score by 50 points after paying off some old bills, consider requesting an upgrade to your existing business line of credit or shopping around with some next tier lenders.
4. Apply in advance when you anticipate a capital need within the next year.
“Most business owners have an idea of what their expenses are going to be over the next 12 months.Take a more strategic approach to borrowing. If you know you will need access to capital quickly in the future, then start applications sooner rather than later to have a line of credit ready when you need it. If your credit profile is not good enough right now to qualify for a loan or credit line, start taking actions today that will help improve your credit profile so you’ll have more options by the time you need it.”
—Ty Kiisel, Editor at OnDeck
These rules can be hard to stick to because for many small business owners it seems counterintuitive to ask for financing when you don’t really need it. But when it comes to a small business line of credit that’s exactly what you need to do.
What to Use a Small Business Line of Credit For
Ideally, a business line of credit is used in the same way that a family’s credit card is used, to cover an unexpected expense or in case of an emergency. They’re not intended to be used to make big capital purchases like real estate or heavy machinery, or as a way to afford normal operating expenses on a regular basis.
More specifically, a business line of credit is generally most useful in four situations:
1. Short-Term Working Capital
LOCs are often used to get working capital to make payroll or to cover expenses when seasonal business is slow or while waiting for customers to pay you. For example, if you are a fashion designer and sell clothes to retail shops, the shops may take a few months to pay you for your work. You can use a business line of credit to cover operating costs and pay back what you borrow when the shops pay you.
2. Safety Net For Unexpected Costs
Some businesses open a line of credit before they need any cash and then use it for unexpected expenses. For instance, if a refrigerator at your restaurant needs emergency repair, a business line of credit would come in handy.
3. Taking Advantage of Unique Purchasing Opportunities
A business’s wholesaler may have a one-time deal for goods the business purchases frequently, or a wholesaler may have a special sale because they are going out of business. Having an available line of credit to buy in bulk when these opportunities pop up can save your business money long-term as your overall costs of goods will go down while using the discounted purchases.
4. More Confidently Offer Trade Credit to Customers
Giving your customers credit does not come without risk. According to recent studies 1 out of every 3 businesses has invoices in accounts receivable for 90+ days. With a small business line of credit, you can be more confident in offering trade credit because you know you have a safety net available if a client is slow to pay.
The further you get away from using your small business line of credit for the above uses, the more likely it is that you’re using a less than optimal financial product – and probably costing your business money. A short term loan might be a good fit for you under these other circumstances. If you need a large sum of capital up front or a longer repayment time period, then OnDeck offers term loan products that might work for you.
How to Qualify for a Business Line of Credit
Lenders who offer business lines of credit typically base their lending decision on five factors:
- Credit score (min. 600+, check yours for free here)
- Time in business (min. 6+ months)
- Recent revenues (min. trailing 3+ months)
- Short-term assets (like accounts receivable or assignable contracts)
- Hard assets (like real estate, machinery, or equipment)
Better qualified businesses will qualify for larger credit line limits, lower interest rates, and more generous repayment schedules. Lesser qualified borrowers may see smaller lines of credit extended to them. They will likely pay a higher interest rate, and they also may be required to make weekly or daily payments on their line of credit rather than monthly payments.
Another thing to keep in mind is that your small business line of credit will show up on your credit report. This is important when you are deciding what size of a line you need.
“The entire line of credit will be reported on your credit profile, so if you need a smaller amount than what you are approved for you should consider requesting the smaller amount (borrowing more than you need can be too costly).”
—Ty Kiisel, Editor at OnDeck.
Note: Many lenders will advertise very low minimum qualification thresholds. In our experience, borrowers who only just meet these advertised minimum requirements are unlikely to be approved for a small business line of credit. This article focuses on minimums more likely to see approval.
A Business Line of Credit Can be Reduced or Called In
It is within a lender’s right to cut off access to a line of credit if the borrower misses payments or if there is a significant decline in business revenue.
Barbara Griffith of Southern California Leasing says that most lenders require businesses to provide a financial statement before each renewal (normally once every 6 months to 1 year) to maintain the line. “If the financial statements do not qualify for the line of credit,” Griffith says, “the lender can call the line due for payment” or reduce the credit line. Calling the line due means that you must pay back outstanding balances within 30-90 days.
This can be really tough on small businesses, which are usually not in a position to pay back a large sum of money in a small amount of time. If you find yourself in this position, it is important to talk to the lender about your options. You may be able to provide documentation proving that any decline in business revenue is just temporary.
Alternatively, you may be able to find another lender who is willing to refinance the debt with a term loan. While this won’t be a revolving line of credit, the longer repayment term will typically result in lower monthly payments and ease your business’s temporary cash flow issues.
A line of credit can be a very affordable solution to short-term working capital needs or emergency financing, but it requires you to plan your application in advance to get the best rates and terms. Your best line of credit option is through a traditional bank lender, but their qualifications are very tough to meet. For the purchase of hard assets or long-term capital investments you’d likely be better off with a business term loan.
If your business is looking to establish a business line of credit quickly, we recommend OnDeck. They offer lines of credit up to $100k, have a very easy application process, and can get you funded in 1-2 business days. If you’ve been in business 9+ months, have a credit score of 600+, and gross more than $75k per year, you can get prequalified in minutes.