Small Business Line of Credit: Types, Requirements, Rates & Terms

A business line of credit offers revolving financing similar to a credit card. The types of lines of credit fall into three categories: unsecured, secured, and personal. Unsecured business line of credit requirements are lower than secured options, but offer less funding. Costs typically start at 10% with funding from $5,000 to $5 million.

How Lines of Credit Work

A line of credit is one of the most common forms of financing available to business owners. Lenders extend credit, and borrowers can draw as much as needed. Once a lender receives payment for a draw, it replenishes the credit line so business owners can draw from it again. This is a revolving credit line and represents most types of lines of credit.

With a normal business loan, a business owner borrows money upfront and uses it over time. Then, if the business owner wants to borrow again, they need to submit another application. The best business lines of credit offer higher flexibility, letting borrowers draw money repeatedly and allowing them to leave the line of credit unused when they don’t need financing.

Lenders have varying business line of credit requirements, with the biggest differentiator being the need for collateral. Lines of credit that require collateral are more difficult to get for most small business owners because they require real estate or equipment. There are also unsecured lines of credit that don’t require collateral. While they are easier to qualify for, they also have shorter repayment terms and typically charge higher interest rates.

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Who a Small Business Line of Credit Is Right For

A small business line of credit is a great financing tool for any business because business owners can qualify and hold the line of credit until it’s needed for expenses like inventory. Small business owners use a line of credit for ongoing expenses like payroll, utilities, or rent. They may also use it to smooth out cash flow in slow seasons, fuel expansion, or to finance equipment purchases.

Business owners use different types of lines of credit for purposes that include:

• Financing recurring expenses: Business owners use unsecured small business lines of credit to cover expenses like rent, utilities, and payroll. Short-term business LOCs and business credit cards are the most popular options for this financing.
• Emergency preparedness: Financial advisers recommend that business owners apply for financing before needing funding to get the best rates and terms. This prepares them for an emergency financing situation with a short- or medium-term line of credit.
• Seasonal financing: Businesses like restaurants rely on financing like lines of credit to cover working capital expenses in the off-season and to buy up inventory before the peak season. Bank lines of credit are the best options for these business owners because they offer low rates and long repayment terms.
• Fleet and equipment purchases: Garage owners looking to finance their ride-share business and construction company owners with a large project rely on equipment-backed financing. These equipment-backed loans offer flexible repayment terms and large amounts of funding because lenders use the equipment as collateral.
• Personal capital injections: 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 a personal line of credit.

These use cases cover some options that business owners can access by getting a business line of credit. It’s important for business owners to determine why they need a line of credit, and once they identify the best option, there are several types of small business lines of credit to choose from.

Types of Small Business Lines of Credit

Business owners should identify whether they need an unsecured, secured, or personal line of credit. 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. If neither is an option, then a personal line of credit may be the best solution.

Unsecured types of lines of credit include:

• Short-term: This type of line of credit has repayment terms that last up to two years and has weekly or monthly payments. Funding amounts are $250,000 or lower and are best used for ongoing expenses like payroll and inventory.
• Medium-term: 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. While dollar amounts are typically under $100,000, business owners can carry a balance and qualify easily. Business credit cards are a great addition to a small business financing toolkit and even offer rewards to small business owners for spending.

Secured types of lines of credit include:

• Bank-issued: These small business lines of credit can get as large as $5 million and banks typically offer them through the SBA CAPLine program. Rates also fall below 10% with repayment terms up to 10 years, making them best for large projects and large 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. 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.

Personal types of lines of credit include:

• Personal: Banks and online lenders offer personal lines of credit without consideration for business qualifications. These credit lines offer up to $100,000 and are best used by startups and low-revenue businesses needing a quick capital injection.
• Home equity line of credit (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 the available home equity. A HELOC also puts the home at risk in the event of non-payment, but offers rates below 10%.

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 can be ideal in an emergency and has much lower requirements to qualify. An unsecured business line of credit also has a quick online application and doesn’t require visiting a bank.

Unsecured Small Business Line of Credit Requirements

Selecting a business line of credit based on qualifications can be an important step for business owners. This is the case for business owners with less than stellar credit who struggle to get approved. In these cases, short-term options are the easiest to access. However, business owners with excellent personal credit and good business fundamentals should select the option that will prove to be the least expensive for their business.

Unsecured Small Business Line of Credit Rates & Fees

Business owners should be aware that short-term funding carries a higher APR, but this does not tell the full story. Because business owners repay these draws quickly, the total cost of borrowing can be lower than a medium-term loan of credit. For example, a short-term draw repaid in one year at 25% APR will cost less than a medium-term draw repaid in two years with a 15% APR.

Unsecured Small Business Line of Credit Terms

The maximum funding amount and funding speed are two integral factors for business owners to consider. 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 carefully evaluate these terms and expect that in most cases, a business will qualify for less than the maximum amount.

Unsecured Small Business Line of Credit Providers

Unsecured Small Business Line of Credit Application

The application process for unsecured business lines of credit is simple and only requires basic information and paperwork. The best business loan brokers and lenders offer the application online and only require recent bank statements to verify revenue. Sometimes, business owners may also need to submit business tax returns, but this requirement is most common with traditional lenders.

Secured Small Business Line of Credit

A secured business line of credit is best for business owners who have significant collateral to pledge for large amounts of capital. Funding is available for up to $25 million, rates are low, and repayment terms extend up to 10 years. However, these lines of credit are more difficult to qualify for and have long application, approval, and funding times.

Secured Small Business Line of Credit Requirements

The minimum requirements for a secured small business line of credit are high. Business owners must have extensive operational history and high annual revenue to qualify. For bank-issued and equipment-backed lines of credit, business owners must also have excellent credit. Invoice-backed lines of credit are sometimes an exception to the high business line of credit requirements because the credit score plays a smaller role in underwriting.

Secured Small Business Line of Credit Rates & Fees

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 because collateral varies and business owners will need to apply to see fee disclosure.

Secured Small Business Line of Credit Terms

High-revenue businesses are best for the secured types of lines of credit. Every secured option offers up to $5 million in funding with long repayment terms that extend up to 10 years. However, funding speeds are typically slower because of the higher business line of credit requirements and more due diligence for collateral.

Secured Small Business Line of Credit Providers

Secured Small Business Line of Credit Application

Some secured business lines of credit have easy-to-access online applications; however, most require an extensive review process. Bank statements, accounting records, and tax returns going back at least a year are part of the paperwork lenders require. Besides those documents, lenders must verify the value of collateral and assess invoice quality.

Personal Line of Credit for Business

Small businesses and startups that need capital often rely on personal financing from business owners and founders. A personal line of credit does not require any business information, but has a high minimum credit score requirement. Small business owners should use personal financing for business sparingly and consider the risks of putting personal assets at stake.

Personal Line of Credit Requirements

Personal lines of credit have high minimum credit score requirements because they rely on this metric to approve borrowers. However, startup founders and new business owners can take advantage of the lack of time-in-business and annual revenue requirements. This is the biggest advantage of this type of line of credit.

Personal Line of Credit Rates & Fees

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 reduce their interest cost even further. However, it’s important that business owners take the time to ensure they have the budget to repay the financing, even if their business underperforms expectations.

Personal Line of Credit Terms

The amount of financing that borrowers can qualify for is lower with personal lines of credit. However, a HELOC can be as high as available home equity, making it a great option for the large financing needs of brick-and-mortar startups. HELOC repayment terms also extend up to 30 years, with 10 years to make draws and 20 years for amortized repayment.

Personal Line of Credit Providers

Personal Line of Credit Application

A personal line of credit application is similar to a business line of credit application, except there are no requirements to submit business documentation. Instead, borrowers can apply online or in-person and must provide at least their personal information and most recent tax return or pay stubs. For HELOCs, the line of credit requirements are more extensive because lenders use the home as collateral.

Pros & Cons of a Small Business Line of Credit

A small business line of credit offers business owners a large amount of flexibility around how they finance expenses. The number of different types of lines of credit that business owners can get also increases the chances of getting the right one. However, these options can be expensive, sometimes require collateral, and offer less funding than term loans.

Pros of a Small Business Line of Credit

Benefits of a small business line of credit include:

• High flexibility: Business owners can use a business line of credit as needed, rather than budgeting a lump sum loan over several expenses. This makes it a great option to finance recurring or unexpected expenses and opportunities.
• Multiple options: The large variety of funding options among small business lines of credit serve the needs of many business owners. Whether a business needs short-term capital quickly or a large line of credit for equipment, there is an option that fits.
• Revolving credit: Access to revolving credit means business owners need not apply multiple times for different financing activities. Instead, once a business owner pays down a draw, the credit becomes available again, making a small business line of credit a great long-term financing tool.

Cons of a Small Business Line of Credit

Drawbacks of a small business line of credit include:

• Potentially expensive: A small business line of credit can be expensive if borrowers don’t repay it quickly or choose to carry a balance for an extended period. However, secured business lines of credit are lower cost because lenders use the equipment and other assets as collateral.
• Requires collateral: Lower cost lines of credit require collateral, which can prevent business owners from accessing other types of financing. This also means that newer businesses without collateral will have fewer funding options.
• Smaller funding amounts: Although the large secured options match the biggest term loans by funding, short-term business lines of credit offer less funding than short-term loans or invoice factoring.

Small Business Line of Credit Frequently Asked Questions (FAQs)

What is a line of credit & how does it work?

A line of credit is a form of revolving financing that lets borrowers draw up to the limit and repay the financing over a set time. Borrowers who repay financing can use the line again to borrow more funds. Lenders only charge interest on the funds a borrower draws, adding to its flexibility.

What is the difference between a line of credit & a loan?

A line of credit offers revolving financing, and business owners can choose when they draw funds and how much money they draw. A loan offers a lump sum of capital that lenders transfer to business owners at origination. Lines of credit are best used for recurring expenses, and loans are best for large purchases.

Is a line of credit easier to get than a loan?

A line of credit is not easier to get than a loan, as both financing types offer some low minimum qualification options. However, borrowers looking to borrow the highest amount of capital immediately should get a loan. If borrowers want more capital over a long period, then a line of credit is a better option.

Does a business line of credit affect credit score?

Like any other financing product, a business line of credit will affect both personal and business credit scores. When applying for a business line of credit, borrowers undergo a hard credit check, which can impact their score. Borrowers who sign a personal guarantee can be personally liable for unpaid business financing, affecting their personal credit.

Bottom Line

Business owners use different types of lines of credit to finance recurring expenses. Business line of credit requirements vary, with major changes surrounding secured, unsecured, and personal options. Business owners should have a strong credit score, solid revenue, and established time in business, but there are options available for any business.