Business Line of Credit Overview
If your business needs easy access to cash for short periods of time, a business line of credit can be just the solution. A line of credit can be useful for inventory purchases, seasonal hires, or other short-term cash needs, and it can also act as a safety net if you need cash in a jiffy. You can keep drawing on your credit line as you pay off what you’ve already borrowed, and you don’t pay interest on money you don’t use.
Free Guide To
Small Business Financing
How Does a Business Line of Credit Work?
A business line of credit is very similar to a credit card. Your lender approves you for a specific limit and you can draw against that limit as needed. Interest is only charged on money that you use.
A line of credit gives you “revolving” access to cash. This means, like a credit card, that you can draw on your line again and again as you pay down what you borrow. For example, say you have a $50,000 credit line and draw $10,000 to buy inventory. As you pay back the $10,000, that money becomes available to you again to use as you wish.
The primary advantage of a line of credit over a business term loan is that you only pay interest on funds that you use. If you have a $100,000 credit line but never use it, you don’t have to pay interest (however, you may have to pay a small annual fee). Therefore, a lot of small business owners get a line of credit as a rainy day insurance policy, only tapping into it when necessary.
It is best to use a line of credit for short-term capital needs, such as seasonal expenses or purchases of supplies, or for emergencies. For long-term investments, such as buying a business or buying a piece of equipment, it is better to get a business loan. A loan gives you a lump sum of money that you pay back with interest over several months or years, allowing you to spread out your payments.
Will I Qualify for a Business Line of Credit?
In order to qualify for a line of credit, you should at minimum have the following:
550+ (check your credit score for free here)
1 year + in business
$2,500 + in monthly revenues
Sometimes, startups that are less than 1 year old can qualify for a line of credit if the business owner has an excellent credit score (above 680).
All else being equal, high credit borrowers whose businesses have been operating at a profit for a number of years will qualify for lower interest rates on a line of credit.
Every 1-2 years, your credit line comes up for renewal. Most lines of credit get renewed as long as the borrower can show proof of continued business profitability.
Cost of a Business Line of Credit
The Annual Percentage Rate (APR) on a business line of credit can range from as low as 5 % to as high as 80 % or more. The rate depends on your business’ age and financials as well your personal credit history.
Borrowers with a strong credit profile and a profitable, established business will typically qualify for the best interest rates. Lines of credit that are supported by collateral generally have better interest rates than unsecured lines of credit.
Interest rates on business lines of credit may be fixed or variable. Fixed rates are always the same, so your payments are the same from month to month. Variable rates change based on the market, so your payments may change from month to month.
Remember, interest is only charged on money that you draw from your credit line. You must, however, make a minimum monthly payment if you have a balance, just like you would have to with a credit card.
There may be costs other than interest, such as annual fees, per transaction fees, etc. These usually aren’t too high and may be negotiated down or eliminated.
Maximum Loan Amount
Typical Loan Term
Renewable every 1-2 years
Typical Interest Rates
5 - 80%
As fast as 1 business day
May be required
Have a question?
Different options available to borrowers of different credit levels.
No interest charged on unused funds.
Can keep drawing on the line as you pay off what you borrow.
Ideal for seasonal expenses, inventory, supplies, and other short-term capital needs.
Your credit line can be reduced or terminated, rendering the balance due right away, if your business revenues decline significantly..
Not a good way to fund long-term investments.
Interest rates may be variable, so monthly payments will increase if market rates increase.
Finding funding for a small business can be daunting. A Google search for “small business loan” brings up 180 million results! In part, this is because the last few years have seen a surge in business financing options. Nonetheless, some approaches stand the test of time. Here are 3 lessons you can learn from how […] Read More