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 like a term loan. The biggest advantages of a business credit line are that you only pay interest on the funds you actually draw.
OnDeck, who has sponsored this article, can help you get a business line of credit quick. You may qualify if you have $100k+ in annual revenues, have been in business for 12+ months, and have a credit score of 600+. OnDeck approves lines of credit up to $100,000. You can apply online in minutes, and be funded in as quick as 1 day.
How a Small Business Line of Credit Works
A business line of credit is a revolving line that you can draw against as you need it. It’s typically used for short term working capital to help improve cash flow, or to finance the costs of unexpected expenses.
These commercial credit lines are similar to a credit card where the line is open and available for you to use, and you only pay interest on the part of the line you draw. It’s a great way to get access to cash which can be put into your business on a moment’s notice.
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. Once a credit line is established, drawing funds from it is usually the fastest way for your business to access capital for quick payments or unexpected events.
Business Line of Credit vs Term Loan
A term loan is a lump sum of money you pay interest on until the entire amount is repaid, and they’re typically fully amortized. Term loans are typically used for a specific purpose, like to fund a large piece of equipment. They’re generally only the right option if you need to immediately use the entire amount you’re approved for to fund a large purchase or other expense.
Business term loans also require you to reapply every time you need to get financed. This means going through underwriting, paying origination fees, and paying closing costs every single time you need more money. If you have a constant financing need, then a line of credit will be much more affordable solution for you.
A business line of credit will give you more flexibility and save you money if you’re not going to immediately use your full line. Plus an open LOC account can be a great way for you to build your business credit until you need it. Line of credit products are typically the best solution for short term needs.
Lines of Credit are Common Among Small Businesses
Since 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. In fact, nearly half of all small business owners currently have a business line of credit.
How Small Business Owners Use Credit
Not only do 47% of small businesses have a line of credit, but 28% ofsmall 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 line of credit might be to regular small business operations.
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, or you can get funded through online lenders. When searching for the right provider for your small business, it’s important to know what your goals are for having the line of credit.
You should ask yourself these four questions prior to determining what type of lender you need:
How to Determine the Business Line of Credit Amount
Credit lines typically have smaller borrowing limits than term loans, which make them ideal for unexpected charges but not for large capital investments. If you’re looking for more than $100K in funding then you’ll want to consider a traditional bank. Anything less than $100K makes you a good fit for an online lender.
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. Once you’re approved you can typically access your funds at any time. If you need initial access to funds quickly upon applying, then you’ll want to look at an online lender which can get you funded in as quick as 1 day.
Do I Meet the Minimum Requirements?
Traditional banks have high minimum qualifications and often require specific collateral. Online providers like OnDeck can be far more flexible. In fact, they often don’t require collateral and can approve businesses once they’ve been in business for at least one year.
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. Additionally, if your bank is offering you a longer repayment term on your credit line then it could end up costing you more than the short term online lenders that are paid back in 6 or 12 months.
In general, only the best borrowers with the most established small businesses will be able to get a 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.
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.
The 4 main things a business line of credit is typically used for are:
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 but your bills might be due before then.
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 when they come up. For instance, if a refrigerator at your restaurant needs an emergency repair, a business line of credit would come in handy to finance a quick fix to the problem.
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 you’re 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 3 businesses have 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 this is 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 in addition to their business line of credit. The qualifications and terms are very similar, and they can still get you funded within 1 business day.
Small Business Line of Credit: Banks vs Online Lenders
You typically have two options when you’re looking for a lender to fund your business line of credit. You can get funded through a traditional bank, who will likely give you the most affordable terms, or you can get funded through an online lender who is much quicker and easier to qualify with.
Most lenders will base their lending decision on the five factors listed in the table below, but 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.
Business Line of Credit Qualifications
You’re going to need to be a prime borrower to get approved for a business line of credit from a traditional bank. Online lenders aren’t as strict in their qualification requirements, and often can get you funded with less revenue or time in business than traditional banks.
|Credit Score||680+ (check yours for free)||600+ (check yours for free)|
|Time in Business||2+ Years||1+ Year|
|Revenue Required||$10K+ in average monthly revenues & trending upward||$100K in annual revenues|
|Collateral||Ability to pledge short term or hard assets||Ability to pledge all short term assets
May take a 2nd position to a traditional bank
|Credit Line Amounts||$10K - $100K||Up to $100K|
|Lenders||Visit Your Local Bank||Visit OnDeck|
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 get funded unless they bring other business or accounts with them. Credit lines are less predictably profitable (compared to a term loan, for example), which means 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, 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%. They’ll also offer longer repayment terms than online lenders. This is a double edged sword. While the monthly costs are likely to be less, the total cost of capital could end up being higher with a traditional bank if you’re in repayment for a significant amount of time (3-5+ years).
The reason banks are willing to provide larger lines of credit at lower interest rates is because bank LOCs are typically secured by collateral. 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 a bank will not want to move forward with a LOC until you have refinanced the equipment loan through a new term loan with them. This allows the bank to have a 1st position UCC lien on 100% of your assets, which is very important to most traditional lenders.
Banks offer the best repayment terms, if you qualify. Many banks will offer 1-5 years to pay off your amount, and many will start the clock over when draw against your line again.
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 more affordable.
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 like OnDeck have stepped in to meet the demand. These alternative lines of credit are typically more expensive but they might be a good fit for a borrower that can’t meet the bank’s qualifications, or one that just 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 friendly repayment schedule.
APRs for most credit line products from alternative lenders are around 20% – 40%.
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. This is an advantage because you can use it to make unexpected payments that require cash.
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. Traditional lenders may also place a lien on your assets, in addition to any pledged collateral.
Online lenders are going to offer repayment terms that are less than a bank, in most cases. Many online lenders only allow 6 months for you to repay the balance of your credit line. However, this time restarts every time you draw on the line.
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’re 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 don’t 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 Lender: 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 $100K with qualifications that are easier than a traditional bank line of credit. You can get approved and have access to capital in as quick as one business day.
|APR||13.99% - 39.9%|
|Maintenance Fees||$20 per month
(Waived for 6 months if you draw $5K+ during the first 5 days of your account being open)
|Repayment Terms||6 Months from your last draw|
Additional Considerations of the OnDeck Business Line of Credit
The LOC limit is capped at 10-15% of your gross revenue. For example, if your annual revenue is $100K, then you will only be approved for a business line of credit that is, at most, 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.
Additionally, 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 outstanding balance of both draws. Payments are re-amortized over the next 6 months.
When to Apply for a Small Business Line of Credit
Applying for a line of credit at the right time can position you to be approved for a larger limit, low interest rate, and more comfortable repayment schedule. Knowing when that time is can help you get the LOC you need for your business.
Generally, it’s a good idea to apply for a line of credit if you match one of these four scenarios:
1. Apply When Your Credit Score is Strong
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 an Upgrade When You Hit a Milestone
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 if You Anticipate an Upcoming Capital Need
“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.
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. 12+ months)
- Recent revenues (min. trailing 3+ months)
- Short-term assets (like accounts receivable or assignable contracts)
- Hard assets (like real estate, machinery, or equipment)
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.
Better qualified businesses will qualify for larger credit line limits, lower interest rates, and more generous repayment schedules. Lesser qualified borrowers 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.
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. This is very important to keep in mind if you’re a business that runs on tight cash flow. You’ll want to be weary of how much of your credit line you use at any given time.
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 quickly. 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.
Applying for a Business Line of Credit: Banks vs Online Lenders
While a business line of credit from a bank can be the most affordable option, it is not the easiest application 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 online lenders don’t require.
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 then 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.
A line of credit can be a very affordable solution for both short-term working capital needs and emergency financing. However, 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. It’s easier to qualify with online lenders, and you’ll get funded much quicker.
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 days. If you’ve been in business for 12+ months, have a credit score of 600+, and gross more than $100K per year, you can get prequalified online in minutes.