A small business line of credit is a revolving credit line that allows you to draw funds only when you need them. This flexibility makes it a good option to consider for covering emergencies, temporary shortages in cash flow, and other short-term expenses.
You can get rates that typically range from 6% to 15%. This 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. Repayment terms are often less than 36 months, so you’ll want to ensure you can pay the loan quickly.
If you’re thinking about getting a small business line of credit, you can check out Clarify Capital, a broker with more than 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 $750,000 in funding.
Lines of Credit Types: Secured vs Unsecured
There are some differences between a secured and unsecured line of credit. Each has its 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 |
Both a secured and an unsecured line of credit allow you to draw funds up to your credit limit, and funds drawn can be deposited into your bank account. In both cases, you get a revolving credit line, so as you pay down the balance, you can make additional draws on an as-needed basis.
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 can take it away to recoup some of its losses if you default on the loan.
Since a lender can expect to recoup some of its losses in the event of a default, secured lines of credit often offer more competitive rates since it represents a lower level of 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 a default. As a result, an unsecured line of credit is riskier for a lender, and rates tend to be higher when compared to a secured line of credit.
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
Rates, terms, and qualification requirements for a small business line of credit will vary depending on the lender you choose. The best provider for you will also be dependent on your business qualifications, needs, and goals. For example, businesses with a large volume of sales on a specific platform like Amazon might benefit from the provider’s own lending products, something we discuss in our guide on Amazon’s corporate credit line.
While rates, terms, and eligibility criteria can vary, we’ve listed typical figures you’ll see when shopping for credit providers.
Typical Rates & Terms | |
Application to Funding Speed |
|
Loan Amount |
|
Estimated Annual Percentage Rate (APR) |
|
Repayment Term | 6 to 36 months |
Repayment Schedule | Weekly or monthly |
Other Loan Fees | Varies |
Typical Qualification Requirements | |
Credit Score | 600-plus |
Time in Business | 6 months |
Annual Revenue | $100,000-plus |
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. 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 providers 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 provider.
- Inactivity fee: Providers may assess this fee if your line of credit has had no activity for a specified time frame. If a lender 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 providers 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 it incurred as part of the initial loan process in determining your eligibility.
If you’re unsure if these apply, you can read your loan agreement or contact your lender.
Qualification requirements can also vary depending on the lender you choose, but many providers 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: Many line of credit providers 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 providers 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. Providers 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.
The stronger your business qualifications, the more likely you’ll be to get approved for a lender’s lowest available rates.
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 Should Get a Small Business Line of Credit?
A line of credit’s flexibility in giving you access to funds when you need it also makes it a good option for unexpected expenses. We’ve summarized some scenarios below that could indicate a business line of credit is a good fit for you:
- 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 five steps:
- Step 1: Determine loan terms suitable for your business needs.
- Step 2: Understand your loan options, such as a secured vs unsecured line of credit.
- Step 3: See how your business stacks up against common qualification requirements.
- Step 4: Find and choose a lender.
- Step 5: Apply and provide required the 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 as to what to expect during the loan review process. If you’re ready to apply, then you may be interested in viewing our recommendations for the best small business line of credit providers 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 of the best working capital loans, you’ll see that we selected several line of credit providers in addition to other term loans. However, if you’re looking for easier qualification requirements or better rates, there are some alternative financing options from which you can choose.
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-plus for secured loans) | $5,000 to $100,000 | Up to $250,000 | Up to $5 million-plus |
Typical APR | 6% to 30%-plus | 20% to 30% | 7% to 10% | 7% to 80%-plus |
Typical Repayment Term | Up to 36 months | Minimum payments until paid in full | 15 years | Up to 10 years |
Typical Credit Score Required | 600-plus | 640-plus | 620-plus | 600-plus |
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 |
Frequently Asked Questions (FAQs)
No, a business line of credit is not hard 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 secured business line of credit will require collateral to be pledged for the loan. Secured lines of credit can offer lower rates but can take longer to fund as the condition and value of the collateral must be evaluated. An unsecured line of credit, on the other hand, does not require collateral and can offer faster funding speeds.
You can get a business credit line as quickly as 1 to 4 days. This can vary depending on the complexity of your business credit and finances and whether you are applying for a secured or unsecured credit line. If you are applying for a secured credit line, it can take between 7 and 21 days to get funded.
Bottom Line
A small business line of credit can be used for a wide range of business expenses, including emergencies and short-term expenses. Rates can vary depending on the lender you choose and your qualifications, such as your credit score, time in business, and annual revenue. Many lenders can fund a wide range of business circumstances, so you should be able to find many options if you’re looking for a business credit line. However, if you’re considering an alternative, we recommend seeing our steps on how to get a small business loan.
