Business Lines of Credit: Where to Find Funding in 2020

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What is a business line of credit?

A business line of credit is a flexible financing option that allows business owners to withdraw money from a set amount instead of borrowing a lump sum. Much like a business credit card, a line of credit for small business owners is revolving, which means that once you pay off the funds you’ve withdrawn, the full amount becomes available again.

If you run your own business, it’s likely there will be a time where you’re going to need access to readily available cash. You could be looking to increase staff, purchase capital goods or grow and expand your company, but you aren’t sure of the exact amount you might need or for how long. If this is the case, then a business line of credit might be your best option.

How does a business line of credit work?

When you obtain a business line of credit, your lender would allow you to borrow money up to a predetermined amount. Your credit limit could be anywhere between $1,000 and $100,000 or more; bank business lines of credit might offer larger amounts than those from online lenders. You’re able to borrow as much as you want within the scope of your total credit amount. Unlike a small business loan, you only pay interest on the money that you actually withdraw, so you aren’t paying for money that you might not need right away.

Companies typically intend to use a business line of credit for two different reasons:

  • The business is experiencing some unforeseen costs and needs additional cash. An example of this might be an auto repair business that needs to replace a broken lift. A credit line would provide the cash to cover this cost.
  • The business needs short-term working capital. Let’s assume that your business is cyclical and you hit a slow period, which could cause cash flow to tighten as you continue operating and paying employees. A business line of credit would give you the funds to stay on your feet until the business cycles back to a more robust period.

It’s important to remember not to abuse lines of credit. A small business line of credit should not be used for large capital expenses like real estate, and it’s also not a way for you to cover your normal operating expenses for a prolonged period. A small business loan would be a better solution for large or long-term expenses.

Secured vs. unsecured business line of credit

A business line of credit may be secured or unsecured, depending on whether a lender requires collateral to back the credit line. If a borrower does not repay their debt, the lender could seize that collateral to recoup losses.

Secured business line of credit

A secured business line of credit would require you to put up specific business assets as collateral. You may have the option to choose from a variety of assets, including commercial real estate. Secured business lines of credit typically have longer time in business requirements than unsecured lines, but you may be approved for larger credit limits and receive a more favorable rate than you would with unsecured financing.

Unsecured business line of credit

An unsecured business line of credit would not require you to pledge specific assets, such as a piece of equipment, as collateral. This lack of collateral may result in higher interest rates and lower credit limits than you may see with a secured credit line. However, you may have to sign a personal guarantee, which would make you personally responsible to repay debt if your business defaults.

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How to get a business line of credit

You could apply for a business line of credit from traditional banks or non-bank, online lenders, which often have more lenient eligibility requirements and faster time to funding than banks. Here are a few lenders to help you start your search for a business line of credit. (This list only includes online lenders, based on leniency of requirements and time to funding.)
  • Kabbage

    Kabbage offers business lines of credit up to $250,000 with a monthly fee between 1.25% and 10.00%. Once you have your credit line, you can make withdrawals as small as $500 up to your credit limit. Kabbage lines of credit are unsecured, though you would need to provide a personal guarantee. In some cases, Kabbage may place a general lien on all of your business assets until you repay your debt.

    Minimum requirements
    •      One year in business
    •      $50,000 in annual revenue or $4,200 in monthly revenue
    •      No minimum credit score
  • OnDeck

    OnDeck’s business line of credit is available from $6,000 to $100,000 with APRs starting at 10.99%. There is a $20 monthly maintenance fee that OnDeck may waive for six months if you withdraw $5,000 or more within the first week of opening your credit line. OnDeck’s business financing must be secured with a personal guarantee. OnDeck also places a general lien on all business assets.

    Minimum requirements
    •      One year in business
    •      $100,000 in annual revenue
  • FundBox

    A business line of credit from FundBox is available up to $100,000. Interest rates may be as low as 4.66% for a 12-week repayment schedule, or 8.99% for a 24-week schedule. FundBox does not require a personal guarantee to secure lines of credit.

    Minimum requirements
    •      Two to three months in business
    •      $50,000 in annual revenue
    •      500 personal credit score
  • BlueVine

    BlueVine offers business lines of credit up to $250,000 with interest rates starting at 4.80% for a 26-week repayment schedule. After receiving your credit line, your first withdrawal must be at least $5,000. From then on, you can make withdrawals as low as $500. BlueVine requires a personal guarantee and a general lien on business assets to secure financing.

    Minimum requirements
    •      Six months in business
    •      $100,000 in annual revenue
    •      600 personal credit score

How to qualify for a small business line of credit?

When determining whether your business would be a good fit for financing, a lender would likely first check your personal credit score. Many lenders require a minimum credit score between 500 and 600 when you apply for a business line of credit. From there, lenders would look at how long you have been in business and your recent revenue.

Time in business

As illustrated above, some lenders may require you to have been operating for one to two years, though others might look for a minimum of only two to six months in business. A true startup business line of credit might be difficult to find, but this type of financing could be a good match for new companies.

Revenue requirements

Revenue requirements depend on the individual lenders, as well as how much capital you are looking to access. Revenue requirements could range from as little as a few thousand in monthly revenue or as much as $100,000 in annual revenue.

Determining your current ratio

Once a lender determines that you would make a good borrower, it would set your credit limit. To do this, the lender would determine your current ratio, which is one of several liquidity ratios that show a business’s assets and liabilities. A current ratio illustrates a company’s likelihood of repaying short-term and long-term debts. To calculate your current ratio, you would divide your current assets by your current liabilities. Your business’s current ratio would indicate how risky you’d be as a borrower, which would inform the interest rate and repayment terms that the lender would assign.

How much will a business line of credit cost?

A benefit of taking out a business line of credit is that you only pay for what you borrow — interest only applies to the amount you withdraw. Average APRs for business lines of credit can range from 8% to 80% or more.

For instance, let’s say you have a business line of credit totaling $50,000 and you withdraw $10,000. If you and the lender agreed on a 10% interest rate, then the interest would total $1,000 for the amount you withdrew. The amount you would be responsible for paying back would be $11,000, not $50,000. Once you have paid off the $11,000, you would have access to the full $50,000 again.

Differences between a business line of credit and a business credit card

Both a business credit card and a business line of credit would give you access to a specific amount of money and allow you to draw from that amount up to a certain limit. But there are some key differences.

Business credit cards can be a useful tool for making capital upgrades, like purchasing new computers. And depending on the card you choose, you may benefit from rewards or gain some cash back. However, business credit cards frequently come with much higher interest rates than what you would receive with a line of credit, especially a line of credit from a bank.

Another difference lies in the fees and penalty charges that come with business credit cards. A business line of credit does not typically include fees, although you may be subject to a maintenance fee to use the credit line.

Frequently asked questions

A line of credit allows a business to draw funds as-needed from a set amount of money. You could borrow as much as you need up to your credit limit, and only pay interest on what you actually borrow. Revolving lines of credit allow you to replenish your full credit amount once you pay back your debt.

You can apply for a business line of credit from traditional banks or online, non-bank business lenders. Online business lenders often have faster time to funding than banks, and more lenient eligibility requirements. However, banks typically have more favorable rates and terms than online lenders.

A business line of credit may be a good idea if you need to cover short-term costs, such as inventory. Opening a business line of credit would also give you access to immediate funding in case of an emergency or unexpected expense. However, a business line of credit wouldn’t be your best option for large purchases or long-term expenses; instead, a small business loan would be the better choice for those costs.