A small business line of credit is a revolving credit facility that allows you to borrow funds on an as-needed basis. You can request a draw on the line, have the funds deposited to your account of choice, use the funds for business purposes, and repay the balance over time. This flexibility makes it a good option for covering emergencies, temporary shortages in cash flow, and other short-term expenses.
There are varying lines of credit available, each with differing loan amounts, rates, and repayment terms. These will vary depending on the lender and your qualification requirements. Eligibility criteria can be flexible, as many lenders can issue funding to startups, businesses with low revenue, and companies with bad credit.
If you’re thinking about getting a small business line of credit, you can check out Clarify Capital, a broker with over 75 lenders in its network. You’ll work with a loan specialist to match you with the right lender, and you can get up to $5 million in funding.
Lines of Credit Types: Secured vs Unsecured
When getting a business line of credit, there are both secured and unsecured loan options. Each has its own pros and cons, and we’ve summarized the key differences below.
Secured Line of Credit | Unsecured Line of Credit | |
|---|---|---|
Collateral | Required | Not required |
Rates | Lower | Higher |
Qualification Requirements | Easier | More difficult |
Funding Speed | Slower | Faster |
The two types can allow you to draw funds up to the credit limit, which can then be deposited into your bank account of choice. Both are considered a revolving credit line, so as you borrow and accrue a balance, you can also repay and reuse the funds over time.
With a secured line of credit, collateral must be pledged as a condition of getting the loan. Pledging collateral for a loan means that the lender has the ability to seize the asset to recoup some of its losses if you default on the loan.
Since the lender can expect to recover some of its losses in the event of a default, secured lines of credit often offer more competitive rates since the collateral provided helps to mitigate risk. However, it can take longer to get approved because of the processes involved with evaluating the collateral’s condition and value.
With an unsecured line of credit, no collateral is pledged in exchange for funding and a lender has less of an ability to recoup losses in the event of default. As a result, this type is considered to be a higher risk to the lender, and so rates tend to be higher to compensate for the lack of collateral.
The tradeoff, however, is that funding speeds tend to be much faster. This is because there is no collateral that needs to be evaluated, a process that can otherwise add one to two weeks to the loan process.
Small Business Line of Credit: Rates, Terms & Qualification Requirements
Depending on the loan type and lender you choose, the rates, terms, and qualifications for a small business line of credit will vary. When choosing which is best for you, be sure to consider your business needs and goals.
We’ve summarized the typical rates and terms you can expect below.
Typical Rates & Terms | |
Application to Funding Speed |
|
Loan Amount |
|
| |
Repayment Term | 6 to 36 months |
Repayment Schedule | Weekly or monthly |
Other Loan Fees | Varies |
Typical Qualification Requirements | |
Credit Score | 600+ |
Time in Business | 6 months |
Annual Revenue | $100,000+ |
While most rates and terms are straightforward, there are some nuances to be aware of. For instance, some lenders require weekly repayments on a line of credit as opposed to a standard monthly payment. Keep in mind, making payments more frequently can negatively impact your business cash flow and is something you should consider.
Loan fees can also vary from lender to lender. Consider the following common fees and how they might impact you based on how you plan on using the line of credit:
- Prepayment penalty: Although uncommon, some lenders may charge additional fees if you pay off your loan early.
- Minimum draw fee: Some lenders charge additional fees if any individual draw amount is less than a certain dollar amount. If you anticipate using a line of credit for small expenses, you may want to consider another lender.
- Inactivity fee: A lender may assess this fee if your line of credit has had no activity for a specified time frame. If it does charge this fee, the time frame is typically at least six months or more.
- Annual fee: As part of the costs associated with maintaining your account, some lenders may charge an annual fee.
- Termination fee: This might apply if you decide to close your account within a certain time frame. Lenders that charge this fee often do so as a way to recoup some of the costs they incurred as part of the initial loan process in determining your eligibility.
Qualification requirements can also vary depending on the lender you choose, but many can cater to businesses in a wide range of circumstances. This includes those with bad credit, newer businesses, and lower revenue.
- Credit score: Your personal credit score and business credit score can be used to determine how you’ve managed debt payments in the past and how likely you are to make timely payments moving forward. If you have poor credit, see our tips for improving a bad credit score.
- Time in business: Lenders often want to see that you’ve been operational and profitable for a certain amount of time. However, many are willing to work with startups, and you should have many options available to you with just six months’ time in business.
- Revenue: Although some lenders consider the amount of your debt payments in determining what loan amount to approve you for, others require a minimum amount of revenue to be eligible for a loan. Lenders often look for a debt service coverage ratio (DSCR) of 1.25x or greater and annual revenue between $50,000 and $100,000 or more.
Pros & Cons of a Small Business Line of Credit
| PROS | CONS |
|---|---|
| Offers flexibility to use funds for any business-related expense | Has interest rates that can be variable |
| Gives you the ability to draw funds on an as-needed basis | Is not ideal for long-term expenses due to short repayment period |
| Lets you make payments only on what you draw | Has annual fees, minimum draw fees, and other fees that may be more expensive than alternatives |
Who a Small Business Line of Credit Is Right For
For business owners who need flexibility in funding to cover various business expenses, a small business line of credit can be used whenever they need it. It may be a good financing option for you if:
- Your business income fluctuates throughout the year, causing potential cash flow concerns.
- You want to be able to quickly cover unexpected expenses.
- You plan on using the loan for short-term expenses only.
- You need the flexibility to use funds for any business-related expense.
How to Get a Small Business Line of Credit
Getting a small business line of credit is something that can be done in six steps.
- Step 1: Evaluate your business needs and how you plan to utilize funds.
- Step 2: Determine loan terms suitable for your business goals.
- Step 3: Understand your loan options, i.e., a secured vs unsecured line of credit.
- Step 4: See how your business stacks up against common qualification requirements.
- Step 5: Find and choose a lender.
- Step 6: Apply and provide the required documentation to get approved for the loan.
You can head over to our in-depth guide on how to get a business line of credit for additional details on each stage. It also contains insights into what to expect during the loan review process.
If you’re ready to apply, then see our recommendations for the best small business lines of credit to find a lender suited for your circumstances.
Business Line of Credit vs Alternatives
A business line of credit can be used for a wide variety of business expenses. If you visit our guide to the best working capital loans, you’ll see that we selected several line of credit lenders in addition to other term loans. However, if you’re looking for easier qualification requirements or better rates, there are some alternative financing options you can choose from.
Typical Small Business Line of Credit | Typical Credit Card | Typical Home Equity Loan (HEL) | Typical Working Capital Term Loan | |
|---|---|---|---|---|
Typical Loan Amount | Up to $500,000 ($5 million+ for secured loans) | $5,000 to $100,000 | Up to $250,000 | Up to $5 million-plus |
Typical APR | 8% to 30%+ | 20% to 30% | 8% to 10% | 8% to 80%+ |
Typical Repayment Term | Up to 36 months | Minimum payments until paid in full | 15 years | Up to 10 years |
Typical Credit Score Required | 600+ | 640+ | 620+ | 600+ |
Typical Business Revenue Required | $100,000 annually | None | Not applicable | Varies |
Typical Time in Business Required | 6 months | None | 2 years if using business income to qualify | 6 months |
Funding Speed | 1 to 4 days (up to 21 days for secured loans) | 7 to 10 days | 21 to 45 days | 1 to 3 days |
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Frequently Asked Questions (FAQs)
Yes, a business line of credit can be easy to get. This is because many lenders have flexible qualification requirements and can offer funding to startups, businesses with low revenue, and companies with bad credit. However, the best rates often require a company to have strong credit and finances.
A business line of credit can be used for a wide variety of business-related expenses—whether it be to cover short-term cash flow, emergencies, or make a business purchase. When issued a line of credit, you can request a draw from the lender in the amount you need, have the funds deposited into your account of choice, and use the funds as necessary. Depending on your repayment schedule, the balance can be repaid over time, with continual draws as you may need them.
Depending on the type of loan and the lender, qualification criteria will vary. Generally, factors such as credit score, annual revenue, and time in business are considered when issuing a lending decision. The stronger your creditworthiness and profitability as a business, the better your chances of being approved.
Bottom Line
A small business line of credit is a good option for businesses needing flexible financing. It can be used for a variety of business purposes, whether it be used to cover short-term expenses or bridge a gap in cash flow. Depending on your business needs, a business line of credit can have varying rates, terms, and qualification requirements.
