Small Business Lines of Credit: Types, Requirements & Rates
Tom has 15 years of experience helping small businesses evaluate financing and banking options. He shares this expertise in Fit Small Business’s financing and banking content.
This article is part of a larger series on Business Financing.
A small business line of credit is one of the most common forms of financing available: a lender extends credit, and a borrower can draw as much as needed up to a designated limit. Once the lender receives repayment of the borrowed funds, it replenishes the credit line so the business owner can draw from it again. This revolving credit line thus acts much like a credit card.
Business lines of credit fall into three categories: unsecured, secured, and personal. Lenders have varying requirements for each, with the biggest differentiator being the need for collateral like real estate or equipment with secured lines of credit. Lenders also offer unsecured lines of credit that don’t require collateral. While unsecured lines of credit are easier to qualify for, they also have shorter repayment terms and typically charge higher interest rates. The best business lines of credit allow higher flexibility, offer competitive rates, and let borrowers draw money as needed.
Who a Small Business Line of Credit Is Right For
A small business line of credit is a great financing tool for businesses as it can be used for ongoing expenses. It may also be used to smooth out cash flow in slow seasons or to help expand a business.
Small business lines of credit can be used by:
- Small businesses with recurring expenses: Business owners use small business lines of credit to cover expenses like rent, utilities, and payroll. Short-term business lines of credit are a popular option.
- Companies planning for an emergency: Financial advisors recommend that business owners apply for financing before a need arises to get better rates and terms.
- Seasonal businesses: Businesses such as restaurants rely on lines of credit to cover expenses in the off-season and to buy inventory in advance of their busiest times of the year.
- Businesses seeking some type of equipment purchase: Equipment with short lifespans or items that cannot be claimed for depreciation can be purchased with business lines of credit. If you’re looking to purchase vehicles or larger capital equipment, an equipment loan with a fixed term arguably makes more sense.
- Startups and newer businesses seeking to inject capital: Startups and businesses in the early stages of development or expansion sometimes require the owners to inject some liquidity. Business owners can get low rates by using their homes as collateral for a home equity line of credit (HELOC), and startup founders can get personal lines of credit.
Types of Small Business Lines of Credit
Once a business owner identifies why they need a line of credit, they should determine what type of line to get. Unsecured lines of credit don’t require collateral but have short repayment terms and higher rates than the other options. Secured lines of credit require collateral but offer lower rates and longer repayment terms.
Unsecured Small Business Line of Credit
Unsecured small business lines of credit have short repayment terms and charge higher rates than secured options. However, this type of funding is useful in an emergency and has much lower requirements for qualification. Businesses can often apply online.
Types of unsecured lines of credit include:
- Short-term: This type of line of credit has repayment terms that last up to two years, with weekly or monthly payments. Funding amounts are $250,000 or lower and are best used by small businesses or for recurring expenses such as inventory.
- Medium-term: This is a small business line of credit that offers up to five years for repayment and funding up to $500,000. Business owners use these loans for seasonal expenses and variable-cost projects. Banks and some alternative lenders offer this type of line of credit.
- Business credit card: Credit cards are the most common form of personal and business financing. Qualification standards are often easier compared to secured lines of credit, and credit limits can be up to $100,000. Business credit cards are a good option in a small business financing toolkit. Many cards offer rewards to small business owners for spending.
Unsecured Small Business Line of Credit Requirements
Type | Minimum Credit Score | Shortest Time in Business | Minimum Annual Revenue |
|---|---|---|---|
Short-term | 550 | 6 months | $100,000 |
Medium-term | 680 | 1 year | $100,000 |
Business credit cards | 600 | No minimum | No minimum |
Short-term lines of credit have fairly relaxed requirements for financing, making them a viable option for business owners with low credit scores and cash flow issues. However, these products carry higher interest rates and lower credit limits than secured lines of credit.
Unsecured Small Business Line of Credit Rates and Fees
Type | APR Range | Origination Fee | Maintenance Fee |
|---|---|---|---|
Short-term | 15% to 80% | Up to 2% | None |
Medium-term | 10% to 30% | Up to 2% | None |
Business credit cards | Up to 30% | None | Up to $150 per year |
Business owners should note that while short-term funding carries a higher annual percentage rate (APR), the total cost of borrowing also factors in how long it takes to repay debt. A short-term draw repaid in one year at 25% APR will cost less than a medium-term draw repaid over two years with a 15% APR.
Unsecured Small Business Line of Credit Terms
Type | Maximum Credit Limit | Longest Repayment Term | Fastest Speed of Funding |
|---|---|---|---|
Short-term | $250,000 | 24 months | 1 day |
Medium-term | $500,000 | 72 months | 2 weeks |
Business credit cards | $100,000 | Indefinite | 1 week |
Funding speed and credit limit are two important factors to consider when choosing a lender, followed by how long you’re allowed to repay borrowed funds. When business owners encounter a funding emergency, they need funds right away and can’t risk only being approved for part of what they need. Business owners should anticipate that, in most cases, a business will qualify for less than the amount they apply for.
A great unsecured line of credit is available with Bluevine. Bluevine offers lines of credit of up to $250,000 for businesses with at least a 625 credit score. The application takes only minutes and funding can occur within a matter of 24 hours.
Secured Small Business Line of Credit
A secured business line of credit is a good choice for business owners who have significant collateral to pledge and need access to larger amounts of capital. Funding is available for up to $25 million, rates are low, and repayment terms extend up to 10 years.
Secured line of credit types include:
- Bank-issued: These small business lines of credit can have credit limits as high as $5 million. Many banks will utilize the Small Business Administration (SBA) CAPLine program. Interest rates tend to fall below 10% with repayment terms of up to 10 years, making them best for larger projects and larger businesses.
- Equipment-backed: Lenders offer equipment-backed lines of credit up to $25 million. These are best used to finance the purchase of several vehicles for a fleet or to finance construction equipment to complete a project. Equipment-backed lines of credit have repayment terms up to the useful life of the equipment.
- Invoice-backed: Invoice-backed lines of credit are similar to invoice factoring. However, business owners don’t sell invoices, and the line of credit amounts can reach $10 million. There are also no repayment terms because as lenders collect invoices, they apply payments toward their line of credit balance.
Secured Small Business Line of Credit Requirements
Type | Minimum Credit Score | Shortest Time in Business | Smallest Annual Revenue |
|---|---|---|---|
Bank-issued | 680 | 2 years | $500,000 |
Equipment-backed | 680 | 2 years | $500,000 |
Invoice-backed | Varies | 2 years | $500,000 |
Secured lines of credit are more difficult to qualify for and have longer application, approval, and funding times than unsecured lines of credit. Business owners must have extensive operational history and relatively high annual revenue to qualify. For bank-issued and equipment-backed lines of credit, business owners must also have good credit. Invoice-backed lines of credit are sometimes an exception to those more stringent requirements as credit score plays a smaller role in underwriting.
Secured Small Business Line of Credit Rates and Fees
Type | APR Range | Origination Fee | Maintenance Fee |
|---|---|---|---|
Bank-issued | 8% to 25% | Up to 5% | Up to $500 per year |
Equipment-backed | 9% to 18% | Varies | Varies |
Invoice-backed | 7% to 20% | Varies | Varies |
Secured business lines of credit can offer borrowers lower rates because loans require collateral, so lenders have something to take if borrowers default. This can be a major benefit to business owners seeking to borrow larger dollar amounts. Origination and maintenance fees vary across secured lines of credit based on the type of collateral and also by the lender.
Secured Small Business Line of Credit Terms
Type | Maximum Credit Limit | Longest Repayment Term | Fastest Speed of Funding |
|---|---|---|---|
Bank-issued | $5 million | Up to 10 years | 1 month |
Equipment-backed | $25 million | Up to the useful life of the equipment | 1 month |
Invoice-backed | $10 million | Repaid through invoice collection | 3 weeks |
Secured lines of credit from a bank can be as large as $5 million, depending on the individual bank’s lending policy. Repayment terms can be as long as 10 years, but your line of credit will likely be reviewed annually by your lender. However, funding speeds are typically slower because of the higher business line of credit requirements and more due diligence for collateral. Secured lines of credit are ideally suited for businesses that do not need fast funding or are higher-revenue businesses in need of a larger credit limit.
Personal Line of Credit for Business
Startup small businesses that need capital often rely on personal financing from the business owners. A personal line of credit does not require any business information but will require good credit.
Consider the risk of using personal assets: Small business owners should thoughtfully review using personal financing for business and consider the risks of putting personal assets at stake.
Types of personal lines of credit include:
- Personal: Banks and online lenders offer personal unsecured lines of credit without consideration for business qualifications. These credit lines go up to $100,000 and are best used by startups and low-revenue businesses whose owners have good credit and require a quick capital injection.
- HELOC: Business owners and entrepreneurs can also access a HELOC to fund their business. It’s important to note that lenders base the size of a home equity line of credit on available home equity. A HELOC also puts the home at risk in the event of non-payment but offers much lower interest rates.
Personal Line of Credit Requirements
Type | Minimum Credit Score | Shortest Time in Business | Smallest Annual Revenue |
|---|---|---|---|
Personal | 720 | N/A | N/A |
HELOC | 660 | N/A | N/A |
Personal lines of credit have high minimum credit score requirements because lenders will rely on this metric in underwriting. Startups and new business owners with good credit can take advantage of the lack of time-in-business and annual-revenue requirements.
Personal Line of Credit Rates and Fees
Type | APR Range | Origination Fee | Maintenance Fee |
|---|---|---|---|
Personal | 7% to 15% | None | None |
HELOC | 4% to 11% | Up to 5% | Up to $75 annually |
Borrowing money with a personal line of credit or HELOC has the benefit of low fees and interest rates. Business owners can access capital and pay it back quickly to lower the cost of borrowing. However, business owners must make sure that they have the budget and cash flow to cover financing in case their business performs below expectations.
Personal Line of Credit Terms
Type | Maximum Credit Limit | Longest Repayment Term | Fastest Speed of Funding |
|---|---|---|---|
Personal | Up to $100,000 | 5 years | 2 weeks |
HELOC | 85% of equity in home | Up to 30 years | 30 days |
Personal line of credit limits can vary by lender and are typically no more than $100,000. However, a HELOC can be as high as available home equity, making it a great option for business owners with sufficient equity that need startup capital. HELOC repayment terms also extend up to 30 years, with up to 10 years to draw from the line and make interest repayments, plus up to 20 years for amortized repayment.
If you’re considering using a personal loan to finance your business, you may want to consider LendingTree. With its online marketplace, LendingTree allows you to compare rates and offers from various lenders to find the financing option that’s right for you.
Pros & Cons of a Small Business Line of Credit
| PROS | CONS |
|---|---|
| High flexibility | Potentially lower credit limits |
| Revolving credit | Potentially higher interest rates if line of credit is unsecured |
| Interest rates for secured lines of credit are very competitive | Secured lines of credit require collateral |
Bottom Line
Business owners use lines of credit to finance recurring expenses. Business line of credit requirements vary based on whether the line is secured with collateral or if a personal line of credit is being used for business needs. Business owners should have a strong credit score, solid revenue, and established time in business, but there are options available for any business.
