Business Line of Credit Guide

Loan Guides      Small Business Loans      Business Line of Credit Guide

A business line of credit (LOC) is a revolving business loan. This means that you have a fixed amount of money that you can borrow on a day-to-day basis as needed. Once you have paid off your debt, your line of credit resets.

LOCs are a great financing option for businesses who need to pay for short-term, daily needs, such as:

  • Inventory

  • Equipment repair

  • Marketing

  • And more

A business line of credit offers extreme flexibility to access money as you need it.

Secured vs. Unsecured

Like traditional business loans, LOCs can be either secured or unsecured.

For a secured business line of credit, you have to pledge assets as collateral. Since business lines of credit are short-term financing solutions, lenders will typically require short-term assets, like inventory to secure the loan.

Unsecured LOCs don’t require collateral. As a result, requirements are often more strict and interest rates are typically higher.

Benefits

Business lines of credit offer several unique benefits that you may not find with traditional business loans, including:

  • Accessibility

  • Flexibility

  • Speed

  • Simplicity

  • You only pay interest on the funds you use

  • You don’t need to reapply for additional funding

The main advantage of LOCs is the ability to access a large sum of money on a revolving basis.

Where to Get a Business Line of Credit?

Most lenders that offer small business loans will also offer business lines of credit. This includes:

  • Banks

  • Credit Unions

  • Alternative Lenders

  • Online Banks

  • The Small Business Administration

Credit limits can vary greatly. Your credit limit can be as low as $5,000 or as large as $500,000, in some cases. Your credit score is a primary factor in determining your available line of credit.

Requirements

The typical requirements for a business line of credit are:

  • A credit score of at least 680

  • No foreclosures, liens, or bankruptcies

  • At least two years in business

  • $100,000 in annual revenue

The specific requirements will be set by your lender, so it’s important to review lender qualifications before applying.

How to Get a Business Line of Credit

Business lines of credit can be a great resource for any company. If you’re interested in applying for a business line of credit, you just need to follow a few simple steps to get started.

- Improve Your Credit Score

Like applying for a credit card, your credit score will be a major factor in determining your credit limit.

You should aim for a FICO score of at least 680 to be approved for a sizeable business line of credit with reasonable interest rates.

If your credit score is lower than this, you can still qualify for an LOC; however, your credit limit will likely be lower than you need.

- Prepare Your Documents

Preparing your documents will help ensure that the application process goes smoothly once you find a lender.

You should gather the following documents in advance:

  • Personal and business tax returns

  • Personal and business bank statements

  • Proof of revenue

  • Financial projections

  • Business plan

  • Resume

Your lender may ask for additional documents, so, when comparing lenders, review their requirements and ask questions to ensure you have all the materials you need to apply.

- Find a Lender

Finding the right lender is all about getting quotes and comparing offers.

It’s important to research at least three to five different lenders and get pre-approved in order to see the credit limit and interest rates that you are eligible for.

Also, make sure to thoroughly review your terms so that you won’t be subjected to any unexpected fees.

- Submit Your Application

After finding the right lender, you just need to fill out and submit your application.

Be sure to stay in communication with your lender throughout the application process. They may ask for additional documents before approving your application and sending you an offer. 

Once approved, review your offer one last time to ensure that you agree with the terms. If you do, you can sign the agreement and access your funds.

Alternatives

Business lines of credit are typically a short-term solution for financing, so traditional long-term business loans may not be a suitable alternative.

However, there are a few other options that can satisfy your short-term funding needs, including:

  • Short-term business loans

  • Personal loans

  • Merchant cash advances

  • Invoice factoring

These can be great resources for short-term funding. It’s important to compare your options to find the right one for your business.

Typical cost is

$1,042/Month

Based on a $50,000 credit line use with a 25% APR