What is a Small Business Line of Credit?

Updated: Oct 23, 2024

Every small business experiences growth and uneven cash flow. That’s why it’s crucial to understand how to access flexible financing options, including loans with manageable repayment terms.

Small business lines of credit (or revolving lines of credit) are a flexible financing option for startups seeking financing. Even profitable businesses often maintain a line of credit to manage unexpected growth or challenges.

Here’s what you need to know about credit lines.

Defining a Small Business Line of Credit

A business credit line is a flexible, low-cost avenue to accessing short-term financing. They allow you to obtain funds to use for any type of expense that arises. However, small business lines of credit lack lump-sum disbursements that you must pay monthly.

Business credit lines involve a credit review conducted on business owners and are renewed yearly. Like a business credit card, these financing options have interest that increases after cash is obtained. This amount must be paid, and you can borrow it again as you settle your balance.

Additionally, credit lines come with a limit on borrowed funds. We’ll discuss how much you can borrow later.

Why Obtain a Small Business Line of Credit?

Accessing short-term funding is the main reason to open a business line of credit. Most businesses need these funds to increase inventory or manage operational expenses, such as supplies and expenses. Seasonal businesses often depend on a credit line to support working capital during the off-season.

Small business lines of credit are also helpful since they don’t need to be used for a specific purpose. Instead, they’re a good funding method for small businesses that need to manage cash flow. You can draw funds from your line of credit through a business checking account, business credit card, or banking app.

A line of credit gives first-time business owners access to money they can borrow from, repay, and borrow from again. When you secure a business loan, you receive a fixed amount of financing.

How Do Secured & Unsecured Lines of Credit Differ?

The major difference between secured and unsecured lines of credit is collateral. Collateral, such as property or other business assets, like equipment or inventory, must guarantee secured lines of credit. If you give specific assets in exchange for this type of business credit line, the lender will set more favorable loan terms and a lower interest rate.

Assets are not required to guarantee unsecured lines of credit. You only need a strong financial profile for these financing options, which may include:

• A good credit score
• How long you’ve been in operation
• A consistent or growing annual revenue

Because it’s riskier for lenders, unsecured credit lines always come with higher interest rates.

Options Beyond Secured & Unsecured Lines of Credit

The U.S. Small Business Administration (SBA) offers an alternative to secured and unsecured lines of credit called SBA CAPLines. You can apply for this financing option under the SBA’s 7(a) loan program if your business doesn’t meet the requirements for obtaining traditional business credit lines.

An SBA guarantee covers CAPLines, potentially convincing lenders to approve your application since the agency’s credit lines decrease their risk.

How Much Can You Borrow with a Business Line of Credit?

Credit line amounts range from $5,000 to $500,000, depending on the lender. Online and traditional lenders offer credit lines within this range, but others may approve higher loan amounts if you need more funds. For example, Wells Fargo’s business financing options include a secured credit line with a maximum amount of $1 million.

Typically, unsecured lines of credit provide a variable interest rate and are available for sums ranging from $10,000 to $250,000. Those set at a minimum of $25,000 usually require business owners to secure a line of credit with a blanket lien on all assets or a certificate of deposit.

The Other Advantages of Maintaining a Line of Credit

Obtaining and maintaining small business lines of credit can also benefit you in the following ways.

• A line of credit can help during periods of slower sales, especially for seasonal businesses.
• A line of credit is useful when a business needs to cover its business expenses. Some business owners need this when customers take a long time to pay for products or services.
• If you need to purchase equipment or inventory at a reduced cost, business owners can pay with a line of credit while waiting for cash flow to increase.

Are There Disadvantages to Securing a Business Credit Line?

Although credit lines offer several advantages, constantly using them to cover business losses or manage your payroll is discouraged. This can affect your cash flow, which a refined accounts receivable process can resolve.

A term loan with lower interest rates may better suit medium to long-term financing than credit lines.

How Do Business Owners Obtain a Business Line of Credit?

It’s easy to apply for a line of credit. You can secure one through a financial institution such as a bank or credit union, a business loan broker, or an online lender.

Some lenders can grant credit lines to startups with at least six months or more time spent in business. New startups may consider lenders such as Fundible or Fundbox. For more established startups, more options are available, including Backd and OnDeck.

What Do You Need to Get a Credit Line?

To qualify for a business line of credit, you must meet a lender’s specific requirements. Common requirements for credit lines include:

Credit Score

When applying for a small business credit line, expect lenders to look at personal and business credit scores. Credit lines can be secured with a low credit score, but most lenders will only grant them to business owners with fair-to-excellent credit. Some creditors set no limits on credit scores, while others require borrowers to have a score of 500 or higher.

If your credit score is lower than the lender’s requirements, disadvantageous terms may apply to your credit line. A creditor may give you a lower loan amount to protect itself when granting loans to high-risk borrowers or require more frequent repayment. In other cases, you could secure a short-term loan that can be used within a short period and should be paid in six to 18 months.

Building your business credit rating is one important advantage to maintaining a line of credit in good standing. In fact, opening a modest line of credit and quickly paying off the debt is a good way to build a credit profile.

Annual Revenue

Minimum annual revenue is another important requirement for small business lines of credit. If you earn at least $50,000 in annual revenue, a lender may approve your loan. Other creditors look for businesses with $100,000 in annual revenue or higher.

Time in Business

Lenders also consider time in business when reviewing credit line applications. While the number of years varies by creditor, most lenders process applications from businesses that have been operating for six months to two years.

Collateral

You may even need collateral to obtain a secured line of credit with lower interest rates. Note that a lender can seize provided assets if you fail to pay the amount you’ve borrowed.

Necessary Documents

Most lenders require certain documents to approve your credit line application. They may ask you to provide documentation and information such as:

• Your name, address, and date of birth
• Personal and business tax returns
• Bank account information
• Your business plan
• Your legal business name and organizing documents, including your Employer Identification Number (EIN)
• Business financial statements
• Information about other lines of credit or existing loans your business has
• A detailed description of your industry and how you’re positioned to profit

For unsecured lines of credit, you may need to submit collateral information and Uniform Commercial Code (UCC) lien filings. Collateral information includes paperwork about your business assets, whereas UCC-related documents authorize the lender to take collateral if you incur unpaid debts.

Other Considerations for Business Lines of Credit

• Interest rates and borrowing limits for business credit lines vary widely, depending on the lender’s requirements and the borrower’s circumstances.
• Some online lenders set more flexible qualification requirements than banks. However, they’re also likely to charge higher rates than banks and may have lower credit limits.
• Lenders typically issue business lines of credit quickly, while banks take longer to grant new lines of credit.
• If you make a specific, one-time purchase, a business term loan may be a better option than a credit line.

Use Business Lines of Credit for Crucial Expenses

In today’s fast-paced business world, keeping your small business finances running smoothly can be challenging. A small business line of credit may be the simple solution you need to meet your objectives for growth and success.

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