Small businesses, even very successful ones, may need access to cash from time to time. There’s just one problem — securing business financing from banks or online lenders can sometimes be a time-consuming process. If only there was a way for small business owners to fill out one application, borrow money, pay it back, and borrow again from the same source the next time they needed cash…
Thankfully, there is a financial tool that works exactly like that. It’s called a business line of credit. It gives your business access to cash on demand.
Business lines of credit can offer you a flexible way to borrow money for your company not just once, but over and over again. This flexibility can make a business line of credit a great financing option for companies that experience periodic cash flow challenges or seasonal sales cycles, or small businesses that need access to working capital repeatedly for other reasons.
What Is a Business Line of Credit?
- An unsecured business line of credit, also known as a revolving line of credit or LOC, lets small business owners borrow money in a way that a traditional business loan doesn’t. With a small business line of credit, a lender doesn’t approve your application and then hand the money over to you in one lump sum. Rather, you’re given the ability to borrow up to a certain preset amount of money known as your credit limit. Here are a few more helpful facts about how business lines of credit work:
- You only pay interest when you borrow money (and only on the amount borrowed).
- There are no prepayment penalties, but you don’t have an interest-free grace period like you enjoy with most credit cards.
- You might be charged annual or monthly fees, even when you’re not actively borrowing money against your LOC.
- You can request cash from your LOC to be deposited directly into your bank account, allowing you to use the funds with creditors who won’t accept a credit card.
- There are generally no cash-advance fees.
- It may take up to one business day for the funds you draw from your LOC to be deposited into your account.
Unsecured vs. Secured Business Line of Credit
There are two types of business LOCs — secured and unsecured. Here’s a look at the differences between the two.
Secured Business Line of Credit
When you take out a secured business line of credit, the lender usually places a lien on the asset(s) you’re using to secure funding. Collateral requirements can vary, but below are some of the types of assets a lender might accept:
- Real Estate (Business or Personal)
- Financial Securities (CDs, Stocks, Bonds, etc.)
Because you have some skin in the game, it’s sometimes easier to qualify for a secured business line of credit than an unsecured option. In a lender’s eyes, collateral reduces risk and can make you a more attractive borrower.
But putting up assets can do more than simply improving your qualification odds. Collateral may also help you secure lower rates, higher credit limits, and better terms from your lender.
Unsecured Business Line of Credit
Of course, many business owners prefer to secure financing without putting an asset on the line. Some businesses, especially startups, might not yet have any assets that a lender would be willing to accept. If you fall into either of these categories, an unsecured business line of credit may be more your speed.
An unsecured business line of credit operates a lot like a business credit card account. You can borrow up to your account limit and, as long as you manage the account well and pay as agreed, you can borrow again against the same line of credit in the future.
You don’t have to put up collateral to back the money your company borrows with an unsecured LOC. That sounds great on the surface and it can reduce the risk you’re taking on as a borrower, but consider the other side of the equation. Unsecured business LOCs often cost more than secured financing.
Less risk for you (the borrower) typically equals more risk for the lender. To offset that added risk, lenders issuing unsecured business lines of credit may:
- Charge higher interest rates and fees
- Issue lower credit limits
- Require shorter payback terms (aka bigger monthly payments)
- Ask you to sign a personal guarantee
That doesn’t mean an unsecured business LOC is a bad choice. Just be sure to consider both the pros and cons before you make a decision about any business funding option.
Personal Guarantees on Unsecured LOCs
Lenders only approve applications for business funding when they’re comfortable with the risk involved. If you’re not putting up any collateral to secure a business line of credit, there’s a good chance you might be asked to sign a personal guarantee instead.
A personal guarantee (PG) essentially makes you a co-signer on your business’ line of credit. When you sign a PG, you’re promising to repay the debt if your business doesn’t pay it back itself. It’s another way for a lender to make sure that you, the business owner, have some skin in the game if you’re not putting up an asset.
(Note: Some lenders may require personal guarantees for secured business lines of credit as well. Be sure to read the fine print and ask any lender questions about personal guarantee requirements before you apply for a line of credit or another type of financing.)
Is a Business Line of Credit a Good Idea?
If your company has been in business for a while and has a decent credit rating, you may be able to open a business line of credit at an affordable rate. Here are three reasons why a business line of credit might be a good idea.
- A business LOC can be helpful when your business needs access to cash to cover business expenses or take advantage of opportunities.
- Opening a business line of credit in advance may help your business prepare for the future, even if you don’t need access to extra working capital now.
- A business LOC might help you to establish better business credit, if your lender reports information to the business credit bureaus.
Now, if you haven’t been in business long or if you have serious credit issues, you may want to consider other funding options. A free Nav account can help you to see your approval odds for dozens of small business loans and credit cards.
How to Qualify for an Unsecured Business Line of Credit
While each lender may have slightly different criteria for credit approval for an unsecured business line of credit, you can expect a few things to come into play:
- How long have you been in business? Many lenders will require your company to have been established for at least one to two years.
- What is your business’ annual revenue? A lender may want to see a minimum amount of earnings (i.e. $50,000, $100,000, etc.). Tax returns and other financial statements may be requested for verification.
- Do you meet the minimum credit score requirement? This might be your personal credit score, business credit score, or some hybrid of both.
- Is your credit history (personal and/or business) in good shape? Most lenders will review your credit reports as part of the application process.
- Will you put up collateral? If so, what kind?
Lenders may look at both your personal and business credit scores to determine eligibility. The higher your credit scores, the lower interest rates you’ll qualify for.
Want to establish business credit but don’t know where to start? This guide may help.
How to Use an Unsecured Business Line of Credit
Once you’re approved for your line of credit, you can use as much as you’d like, up to that credit limit. Let’s say you’re approved for $100,000, and you need $25,000 right now for property renovations. You spend that money and start paying it back.
Then in a few months, you need another $50,000 to hire new staff and invest in marketing. This would be rolled into the amount you already are paying.
As you pay back what you’ve borrowed, it becomes available to borrow again (and again and again).
Compare Options: Unsecured Business Lines of Credit Lenders
Anytime you research financing options, one of the biggest factors you’ll likely consider is the cost. How much will you have to pay to access the funds you need?
To answer the previous question, you need two important pieces of information:
- What interest rate will the lender charge you?
- Are there any additional fees?
Once you have the numbers, you can plug them into a business loan calculator (like these free ones from Nav) to calculate the cost.
Ready to start your research? Below are seven popular lenders who offer business lines of credit, along with the rates and fees these lenders currently charge.
Wells Fargo Business Line of Credit
Wells Fargo is the third-largest bank in the U.S. It offers many financial products to its small business customers including credit cards, commercial bank accounts, and a number of financing options including business lines of credit.
Wells Fargo’s unsecured BusinessLine Line of Credit is available to qualified borrowers with credit limits up to $100,000. The annual fee ($95 for credit limits up to $25,000 and $175 for credit limits above that amount) is waived the first year. There is also a 3% cash advance fee if you use an ATM or BusinessLine Mastercard to access your funds. (Checks, online and phone transfers, plus online bill pay don’t incur this additional fee.)
To qualify, your company should ideally have at least two years in business under its belt. All business owners that hold 25% or more ownership in the company must provide a personal guarantee.
|Interest Rate:||APR may be as low as the Prime Rate plus 1.75%.|
|Terms:||The line of credit is revolving and doesn’t require a scheduled annual review.|
|Secured or Unsecured:||Unsecured (but the bank offers secured options as well).|
Chase Business Line of Credit
Chase, the biggest commercial bank in the U.S., is well known for providing a number of business bank account and credit card options to small business owners. Chase also offers business lines of credit up to $500,000.
To be eligible for a Chase business LOC, you must live in one of these states: AZ, CA, CO, CT, DE, FL, GA, ID, IL, IN, KY, LA, MA, MD, MI, NJ, NV, NY, OH, OK, OR, PA, TX, UT, VA, WA, WI, or WV.
Chase isn’t as transparent online as some other lenders when it comes to rates and fees. The bank’s website states that your APR is based on factors like your banking relationship, credit history, and any collateral you put up. But if you want specifics, you’ll have to talk to a Chase branch manager or relationship manager. There is an annual fee for the account, but it’s automatically waived if your average utilization on your LOC is 40% or higher.
|Interest Rate:||Not stated.|
|Terms:||Five-year (renewable) revolving terms.|
|Secured or Unsecured:||Secured option is mentioned on website.|
Bank of America Business Line of Credit
Bank of America is another financial institution that provides business credit cards, commercial bank accounts, and merchant services solutions to small businesses. Additionally, Bank of America offers business lines of credit up to $100,000. Note that at the time of writing this, the bank is not currently processing new LOC applications because of COVID-19.
Qualifying for a Business Advantage Credit Line with Bank of America requires a personal FICO credit score higher than 670. Your company also needs at least two years in business under the current owner (that’s you) and a minimum of $100,000 in annual revenue.
Funding is a little on the slow side. If you’re approved, it can take up to 10 business days to access your funds.
|Interest Rate:||APR can be as low as 4.50%.|
|Terms:||Revolving terms subject to a credit review and annual renewal.|
|Secured or Unsecured:||Unsecured (though the bank does offer a secured LOC option as well).|
Capital One Business Line of Credit
Capital One, best known as a long-time credit card issuer, also provides banking and lending services to individuals and small businesses alike. The bank offers Working Capital Lines of Credit to qualified businesses starting at $10,000.
The maximum credit limit a business may receive is unclear, but the bank does disclose that if you apply for a business line of credit for under $50,000 you don’t have to provide a financial statement as part of your application. To qualify you’ll need at least two years in business and a business checking account.
Capital One is the least transparent lender on our list when it comes to sharing the details about its rates and terms for business lines of credit online. This means you’ll have to take the time to contact a Capital One banker directly for more information before you can compare the cost of its LOC to any other business funding options you’re considering.
|Interest Rate:||Not stated.|
|Secured or Unsecured:||Not stated.|
OnDeck is an online small business lender that offers business lines of credit up to $100,000 to qualifying businesses.
To qualify for a LOC with OnDeck, your business will need to be at least one year old. It will also need an annual revenue of $100,000 or more. On the plus side, your personal FICO Score only needs to be 600, so you might qualify even if your credit is less than perfect.
You may be able to access funding in as little as one day. However, OnDeck’s repayment terms are on the short side. Each time you make a draw, you’ll have a maximum of 12 months to pay it back.
OnDeck charges an origination fee plus a $20 monthly maintenance fee on business lines of credit. The business owner also has to provide a personal guarantee.
|Interest Rate:||Starts at 35.9%.|
|Terms:||Daily or weekly payments (automatically drafted) for up to 12 months per draw on your line of credit.|
|Secured or Unsecured:||A general lien is placed against the business itself and its assets.|
SBA Business Line of Credit Rates
The U.S. Small Business Administration guarantees four separate types of business lines of credit through its SBA CAPLines Program. Through the CAPLines Program, qualified applicants may borrow up to $5 million dollars through an SBA-approved lender.
SBA loans and lines of credit are known for their very low interest rates. However, the application process is typically long and SBA qualification requirements can be intense.
You’ll need decent personal and business credit to qualify because the SBA uses the FICO SBSS Score to evaluate applicants. FICO SBSS is a hybrid score that considers factors from your personal and business credit profiles. Anyone who holds at least 20% ownership in the business will be required to sign a personal guarantee.
Finally, if your business operates in any of the SBA’s excluded industries, you won’t be eligible for an SBA-backed line of credit. Ineligible industries include non-profits, government-owned organizations, religious institutions, and more.
|Interest Rate:||APR is typically low and set by the lender.|
|Terms:||Up to ten years maximum (five years for the Builders CAPLine), but ultimately up to the lender to decide.|
|Secured or Unsecured:||Secured — Collateral (including personal assets) may be required by the lender.|
How does an unsecured business line of credit work?
Once you’re approved for an unsecured business line of credit, you can borrow against the maximum amount. Pay back just what you’ve borrowed, and you can borrow from the line again.
How do I get unsecured business credit?
Some lenders offer unsecured business lines of credit, meaning you don’t have to put up collateral for the money you borrow. These options may have higher interest rates than secured lines of credit. Check with your lender to understand what’s required to apply.
Nav’s Verdict: Unsecured Business Lines of Credit
Your business’ ability to access credit is a valuable asset. This is true even if you don’t need to borrow money right now. It’s smart to work in advance to prepare your credit now so you have the option to use it if needed down the road. And if you need some money now and some later, a business line of credit could be the ideal solution.