Small Business Line of Credit: How to Choose the Right Option

Small Business Line of Credit: How to Choose the Right Option

Small Business Line of Credit: How to Choose the Right Option

Advertiser & Editorial Disclosure

A small business line of credit helps entrepreneurs maintain  a constant supply of cash to keep up with recurring expenses and the ebb and flow of seasonal changes in business. For the 50% of businesses owner who have experienced cash flow problems, a small business line of credit can be a necessary lifeline.

You may be thinking: “My business is profitable, we don’t need additional cash reserves.” But many businesses with and without cash flow issues keep a line of credit handy for unexpected growth or expansion opportunities.  A business line of credit is a flexible, often low-cost way to cover short-term financing needs regardless of the nature of those needs.

Business line of credit basics:

How does a business line of credit work?

A business line of credit is a flexible loan option for businesses. It is also called a revolving line of credit. Businesses are allocated a specified maximum amount of capital available to them through a lender based off certain factors such as current cash flow and business credit rating. A line of credit is similar to a credit card.

Unlike a business loan, where a business must make regular daily, weekly, or monthly payments to repay the loan, a business line of credit is only repaid when the business draws from the line.  Interest will also only be charged only when you decide to pull money from the line. The business then decides when, if, and how they would like to use that capital.You will have a specified repayment period, but, like a credit card, there is no penalty for paying early (in fact, it is encouraged).

Although interest is only charged once you use the line, there may be a monthly maintenance fee for letting your line of credit sit unused. For any line of credit you consider you need to carefully read the terms offered by the bank or lender to make sure you understand any associated fees.

What is a secured vs. unsecured business line of credit?

A secured line of credit is a line in which the borrower puts up collateral as a security deposit on the line of credit. Putting up property as a form of collateral is common, but this could also be other items owned by the business, such as equipment or inventory.

Secured lines may be preferred over unsecured lines by both lenders and borrowers. The lender is taking on less risk, so they will usually grant a higher credit maximum at a lower rate for secured lines. New businesses or businesses with poor business credit might only qualify for a secured line of credit because of the inherently higher risk.

In contrast to a secured line, an unsecured business line of credit does not require collateral assets. Unsecured lines of credit are more expensive because the lender assumes higher risk. Credit cards are a type of unsecured line of credit. Businesses with many years under their belts and stellar business credit reports are more likely to qualify for unsecured business credit lines at reasonable rates.

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What is a business line of credit used for?

If you are looking to fund a one-time project or a very long-term project, a business loan might be a better fit for you than a business line of credit. Here are a few ways you might use a business line of credit:

  • Your business has seasonal fluctuations — perhaps your sales take a dip in the summer.
  • A line of credit will help during the periods of low sales.
  • Your clients take 30 days or longer to pay you for products or services you provide. You might need a line of credit to cover the interim time until you are paid.
  • You land a huge client and need credit to cover the cost of materials while you ramp up work for the client. A business line of credit can cover expenses during production.
  • You have the opportunity to receive a discount if you pay a particular bill early — if the resulting discount is significant, you can cover the bill with your line of credit while you wait for cash flow to catch up.

What are the requirements to qualify for a business line of credit?

A lender will look at your time in business, your personal credit score, annual revenue, the strength of your cash flow and may even look at the strength of your business credit to qualify you for a business line of credit. If you don’t yet have a bank account set up for your business, and if you are not yet building business credit, it will be wise to start if you suspect a future need for a business line of credit.

An additional factor that a lender will look at is your ability to secure the line. Again, a secured line will be a less expensive option, so if you can put up collateral for the line of credit, a lender will be more likely to approve your application.

Like with many financing options, the best time to get a line of credit for your business is well before you actually need it. You’re more likely to qualify for the best terms when your business is in great shape and has no cash flow problems.

Remember: you’re only charged interest on the amount that you borrow. If you secure a line of credit now you’re not obliged to use it, but it will be there when you do run into tight cash flow situations.

Best Business Lines of Credit

Kabbage: Best option for business owners with personal credit scores less than 600

Kabbage offers lines of credit for working capital from $500 – $250,000. Kabbage is a good option for poor credit because they focus on your business cash flow instead of your credit scores to determine whether or not to extend you credit.

When it comes to repaying what you draw on the line, Kabbage business lines of credit feature monthly payments for 6 or 12 months. Each month you pay back ⅙ or 1/12 of your loan depending on the length of your repayment term. If you withdrew funds that month, you will also be charged a fee. Rates range widely from 20% – 90% APR depending on the health of your business, so watch out of that number and make sure you understand what it means before you take on a Kabbage line of credit.

Fundbox: Best option for startups

Line of Credit by Fundbox

The Fundbox Line of Credit is a common sense approach to small business funding, with Learn More

Fundbox has one of the least strict time-in-business requirements. You only need to be in business for 3 months to be considered for a Fundbox line of credit. You will have to meet other requirements—your business needs to have a business checking account and at least $25,000 in annual revenue. Fundbox business lines of credit are available up to $100,000.

Streetshares: Best business line of credit option for business lines of credit up to $100,000

StreetShares is a veteran-owned business that offers lines of credit $5,000 – $100,000 to established businesses. When you draw from the business line of credit, you’ll pay it back in weekly increments for 3 to 36 months. To qualify, you must be 1+ year in business with reasonable credit.

LendSpark: Best for established businesses seeking +$100,000 

LendSpark offers business lines of credit up to $500,000 for established businesses with at least 2 years in business. LendSpark’s business lines do not report to personal credit, so you can rest easy knowing your personal credit is safe.

This article was originally written on August 8, 2018 and updated on June 25, 2020.

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Gerri Detweiler

Education Director for Nav

Credit expert Gerri Detweiler is Education Director for Nav. She has more than three decades of experience in consumer credit education, has been interviewed in more than 3500 news stories, and answered over 10,000 credit questions online. Her articles have been widely syndicated on sites such as MSN, Forbes, and MarketWatch. She is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track. She has testified before Congress on consumer credit legislation.

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7 responses to “Small Business Line of Credit: How to Choose the Right Option

  1. Do you know of any lenders that will extend a line of credit to a Tech start-up company? I’ve been in business for over three years.

    1. Walter, Lending environments are changing daily. You can set up a call with our Credit & Lending Specialists – just keep in mind they are booked out right now due to demand for the SBA Cares Paycheck Protection loans. But we’ll help as soon as we can!

  2. What companies and/or BLC’s do you recommend for persons wanting to do fix’n’flip rehabs in real estate, where $200,000 can be bought for half or less of ARV, repaired with minimal investment , then sold at or near full market value?

    1. Benton, Nav offers a free lending marketplace where we work with a variety of lenders. You can check it out with a free Nav account (which won’t affect your credit scores). If you have any questions about your specific options you can always talk with our Credit & Lending team. Many of our Nav customers are involved in real estate.