Small Business line of Credit – How to Find the Right One for your SMB

Denise Elizabeth P
Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: April 26, 2021
Date Published: February 23, 2021

Most small businesses, even successful ones need some sort of funding whether it is provided by the owner, partners or through financing via a loan or line of credit.

Securing business financing from banks or online lenders can sometimes be a time-consuming process.

Lines of credit are more simple and easier to obtain.

Today we are going to talk about how to secure a Small Business line of Credit – How to Find the Right One for your SMB.

With a line of credit, business owners only need to fill out one application, borrow money, pay it back, and borrow again from the same source the next time they need cash.

A business line of credit gives your business access to cash on demand, over and over again.

For this reason, many small businesses turn to credit lines to help them successfully get their feet on the ground or pull extra funds when needed.

The flexibility of a line of credit provides financing options for companies that experience periodic cash flow challenges, seasonal sales cycles, or small businesses that need access to working capital repeatedly for other reasons.

In this article we are going to learn about Lines of Credit, what and how they are used, the different types, and the best lines of credit to get you started on your search.

What Is a Business Line of Credit?

A business line of credit is a flexible business 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 on certain factors such as cash flow and business credit rating.

A line of credit is similar to a credit card in that you can access your credit line, make repayment, and access the credit line again.

A small business line of credit, also known as a revolving line of credit or LOC, lets small businesses borrow money in a way that is different from a traditional loan.

With a traditional loan, the lender gives you one lump sum of money to use and repay monthly, plus interest.

With a small business line of credit, you’re given the ability to borrow up to a certain preset amount of money known as your credit limit.

With a line of credit, you only pay interest when you borrow money (and only on the amount borrowed).

What you need to know about LOC’s

  • There are no prepayment penalties on this type of business loan, 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 business credit line.
  • 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.
  • No cash-advance fees are generally charged.
  • It may take up to one business day for the funds you draw from your LOC to be deposited into your account.

What are LOCs used for?

Business loans are great for funding a one-time project or a very long-term project while a LOC is used more as a readily available source of funds should the need arise.

Not to say that you can’t use an LOC for a project!

Here are some ways a business might use a business credit line (LOC):

  • Your business has seasonal fluctuations-perhaps your sales take a dip in the summer.
  • A business credit line will help during 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 extra capital to cover the cost of materials while you ramp up work for the client. A 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.

Unsecured vs Secured Business Lines of Credit

Secured Business Line of Credit

Some business financing options require you to back them with an asset or collateral of some kind – this is called a secured business line of credit.

When you take out a secured business line of credit, the lender usually places a lien on the asset or assets you are using to secure funding.

Because you have some skin in the game, it’s sometimes easier to qualify for a secured business line of credit than an unsecured business line.

Some types of collateral used for a secured business line of credit include:

  • Real Estate (Business or Personal)
  • Vehicles
  • Inventory
  • Cash
  • Financial Securities (CDs, Stocks, Bonds, etc.)
  • Equipment
  • Invoices

An equipment loan, for example, is typically backed by the piece of equipment your business financed with the lender.

If you default on the loan, the lender can take the equipment as collateral for the default loan.

The asset, in this case the equipment, helps the lender cover the money you borrowed.

But putting up assets can do more than simply improving your qualification odds.

Collateral may also help you secure a lower interest rate, higher credit limits, and better terms from your lender.

Unsecured Business Line of Credit

An unsecured business line of credit is different – they are not backed by collateral or a security deposit.

Instead, your business is generally approved for this type of financing based upon your personal credit or business credit, finances, and any other factors that a lender wishes to consider.

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 per the repayment term, you can borrow again against the same line of credit in the future, like a revolving line.

You don’t have to put up collateral to back the money your company borrows with an unsecured line of credit.

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 lines of credit often cost more than secured financing.

Unsecured LOCs charge a higher interest rate and fees, offer lower credit limits, shorter payback terms, and ask for a personal guarantee.

A personal guarantee essentially makes you a co-signer on your business’ line of credit.

When you sign a personal guarantee, you’re promising to repay the debt if your business doesn’t pay it back itself.

This means if your business is not making the monthly payment on the LOC, you are personally responsible for the balance due.

This can effect your personal credit score if you are not careful.

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.

This doesn’t mean unsecured LOCs are a bad choice, just be sure to consider both the pros and cons of this decision and how you want to use the credit loan.

unsecured business line of credit

Requirements to Qualify for a business LOC

Most lenders will look at a few different factors when considering you for a LOC.

They will look at how long you have been in business, the cash flow and strength of your business, your bank account, as well as your creditworthiness.

At the very least they will require that your business have a bank account.

If you don’t have much credit history, they will ask you to secure the line with some sort of collateral.

Similar to most financing options, the best time to get a line of credit for your business is when your business has a healthy revenue and cash flow-rather than when your business is in a cash flow crunch.

You’re more likely to qualify for the best terms when your business is in good financial shape and has no cash flow problems (this will get you a lower interest rate and more favorable terms).

To get you started, here are some things that lenders look for:

  • 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?

Why Businesses use LOCs

  • A business LOC can be a great financing option for 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. Make your credit work for you and use this as an apportunity to grow your credit for future funding opportunites.
  • Can be used as a revolving credit line as needed, unlike a traditional term loan or traditional small business loan.

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.

Best Business Lines of Credit:

There are several great lenders who offer business lines of credits from a traditional lender like a bank or credit union to an alternative lender like Kabbage or SBA.

As a small business owner, this list will help you get started on your search for the right Line of Credit for your business.

FundBox

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.

Wells Fargo Business Line of Credit

Wells Fargo is the fourth-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 4% cash advance fee if you use an ATM or BusinessLine Mastercard to access your funds.

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.

The bank also offers the Wells Fargo Small Business Advantage Line of Credit, backed by the Small Business Administration .

It’s ideal for businesses that have been established for under two years.

To qualify, you’ll need to be a for-profit business that meets the SBA’s requirements.

Chase Business Line of Credit

Chase, the biggest commercial bank in the U.S., is well known for providing a number of business 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, FL, GA, ID, IL, IN, KY, LA, MA, MD, MI, NJ, NV, NY, OH, OK, OR, TX, UT, 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.

Bank of America 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.

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.

An origination fee of $150 typically applies to new accounts, but a limited-time offer could potentially save you that amount currently.

Funding is a little on the slow side.

If you’re approved, it can take up to 10 business days to access your funds.

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.

Kabbage

Kabbage’s website states that it’s not a lender.

Rather, it’s an online platform that offers up to a $250,000 revolving line of credit (through Celtic Bank of Utah) to qualified business applicants.

To qualify for a Kabbage LOC, you’ll need to have a strong credit profile (business and personal) plus at least 12 months in business.

You’ll also need at least $50,000 in annual business revenue.

Funding can be accessed as quickly as seven minutes, but the rates the lender charges are expensive.

OnDeck

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 six 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 .

SBA Business Line of Credit

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.

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  1. SBA.gov "COVID-19 relief options" Page 1 . April 7, 2021

  2. SBA.gov "Paycheck Protection Program" Page 1 . April 7, 2021

  3. treasury.gov "The CARES Act Provides Assistance to Small Businesses " Page 1 . April 7, 2021