Business line of credit: What it is, how it works, & best options

Businesses with and without cash flow issues often keep a line of credit handy for unexpected cash flow challenges or expansion opportunities.

Learn more about this financing option here.

What is a business line of credit?

A small business line of credit is a type of financing that allows business owners to borrow when they need funds, pay back the debt, and borrow again. It is popular for short-term working capital needs like unexpected expenses, cash flow challenges, or business opportunities that require a quick decision. 

Rather than borrowing a lump sum of money like you would with a term loan, a line of credit gives you access to a certain amount of money (your credit limit), which you can borrow against, repay, and borrow from again.

Think of it like you would a credit card: It's there when you need it.

Most business lines of credit are revolving credit, meaning you can use funds, pay them back, and use them again. This differs from a non-revolving loan (often called an “installment loan” or “term loan”) where once you repay the borrowed amount, you can't access those funds again without reapplying.

How does a business line of credit work?

If you are familiar with how a credit card works, you have the basic idea of how a line of credit works. Here’s how a business line of credit works, step by step. 

Step 1: Apply for a line of credit 

You can apply through a bank, credit union, online lender, or business loan broker. Each lender will have its own application requirements, but you’ll often need to provide copies of business bank statements (or online access to that information) to verify revenues. Lenders will often check personal credit and/or business credit. A personal credit check may be a soft inquiry, which doesn’t affect your credit scores. 

Step 2: Get approved with a credit limit 

If you are approved, your lender will usually give you a specific credit limit, which is the maximum amount you can borrow at one time. The limit is often based on your credit scores, business financials, and the lender's risk assessment.

Step 3: Access funds as needed 

You can typically draw funds through bank transfers to your business account or using a card provided by the lender. You only pay interest on the amount you actually use, not your entire credit limit.

Note that some lenders charge a draw fee each time you access funds, and they may charge monthly or annual maintenance fees. Review costs carefully before you borrow.

Step 4: Make payments 

The typical advantage of lines of credit is that you can often make minimum payments or pay off the balance in full. This helps you match payments to cash flow. 

But repayment terms can vary significantly depending on your lender and the type of line of credit:

Traditional revolving payments 

Make minimum monthly payments (often interest-only) during the draw period, then enter a repayment phase where you pay down the balance over a set timeframe.

Installment-style payments 

Some lines of credit work like hybrid loan products: you draw what you need but repay that amount in fixed installments, usually over 2–24 months.

Weekly payments 

Alternative lenders may require weekly or even daily payments until the balance is paid back.

Short-term repayment

Some lenders offer very short access periods (1–3 months) with full repayment required by the end of the term.

Benefits of a business line of credit

Here are just a few examples of scenarios where your business may benefit from a business line of credit:

• Your business experiences seasonal fluctuations: Perhaps sales take a dip in the summer or winter in your business. A line of credit may help your business during periods of low sales.
• Your clients take weeks (or longer) to pay you: It’s not unusual for businesses to get paid slowly for their products or services. The business might need a line of credit to cover business expenses while waiting to get paid.
• You land a new client and need extra capital: You may need to quickly cover the cost of labor, supplies, or other expenses during production.
• You have the opportunity to purchase equipment or inventory at a reduced cost: You may be able to make a large purchase with your line of credit while you wait for cash flow to catch up.
• You need financing in stages: Let’s say you are expanding your business. You’ll need $50,000 now, $7,000 in six months, and another $2,000 next year. A line of credit lets you get the cash you need when you need it rather than paying interest on a lump sum of money you won't need for a while.

Some key advantages of lines of credit include:

Interest accrues only on drawn amounts 

You pay interest on the amount you borrow, and you aren’t paying interest on money you don't use. (Keep in mind there may be fees.)

Matches irregular cash flow  

Having quick access to funds can be helpful for businesses with seasonal or unpredictable revenue patterns. It may allow business owners to cover essential expenses until revenue comes in. 

No need to reapply 

Typically, once you are approved you can continue to use the line of credit when you need it. But keep in mind that lenders may review credit or terms on a regular basis, and it is possible the credit limit could be reduced, or even closed.

How to get a business line of credit

You can apply for a line of credit through a bank or credit union, an online lender, a business loan broker, or if you want to compare multiple options, through an online marketplace where you'll be able to shop among various lenders.

Here's an overview of the step-by-step process:

1. Check your credit scores: Lenders may review your personal credit, business credit, or both. It can be helpful to know what they may see when they do. 
2. Gather financial documents: Again, lenders may require business bank statements, tax returns, or even financial statements
3. Research lenders: Options may include banks or credit unions, SBA loans, and online lenders
4. Complete applications: Respond to any requests from the lender for additional documentation. 
5. Review terms: Make sure you understand the interest rate, fees, and credit limits
6. Accept the offer: When you have been approved for the financing you wanted, you can accept the financing.

When it comes to business line of credit requirements, lenders may evaluate any of the following factors during the application process:

• Time in business: Some lenders may require two years or more in business, but there are options that may be more flexible.
• Personal credit scores and/or business credit scores: Lender qualifications vary, but for those that check personal credit scores, scores of 620-650 or higher may be required. Banks often require personal credit scores of 680-700+.
• Revenue: Business income will often be verified via bank statements, financial statements, and/or tax returns.

If you do not have a business checking account that shows how much money your business makes, you may find it more difficult to qualify. In addition, some lenders will not lend to sole proprietors, so forming a business entity, such as an LLC, S corp, or C corp may be helpful.

Most business lines of credit are unsecured loans. When that’s the case, you won’t have to pledge personal or business assets such as equipment or real estate to qualify.

Best business lines of credit

Ultimately, the best business line of credit is one that meets your business needs, and for which your business qualifies. 

Here are some Nav partners we recommend checking out in your search. These loan options are provided by Nav partners and approval depends on the lender’s review.

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Line of Credit by Fundbox

Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

• 625 minimum personal credit score
• No impact to credit score to apply (soft pull only)
• No draw fees
• Fast approval and funding, with funds available as soon as the next business day
• Use as much as you need, only pay interest on what you use
• Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.

Cons

• Must have a business checking account with a minimum balance of $500
• May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.

Funding Amount

$1,000 - $150,000

Cost

As low as 4.99%*

Repayment Terms

12 or 24 weeks

Funding Speed

If approved, funds arrive as soon as the next business day.

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Line of Credit by OnDeck

Monthly Payments and extended repayment terms (18 and 24 month terms) available. A line of credit can be a great asset to businesses who need capital on hand- fast. It allows you the flexibility to draw funds when you need it, and you only pay interest on what you use. Once approved, you can draw available funds quickly and easily without having to provide additional documentation.

Pros

• No monthly maintenance fees
• Monthly Payments available and Extended Repayment Terms (12, 18 and 24 months) Minimal paperwork
• As soon as same-day approval and funding sent by next business day
• Transparent pricing
• Use as much as you need, only pay interest on what you use
• Access available funds with one click.

Cons

• Not available in all states.

Funding Amount

$6,000 - $200,000

Cost

As low as 29.9% APR

Repayment Terms

12, 18 and 24 month repayment term, resets after each withdrawal - Weekly & Monthly Payments

Funding Speed

As fast as 1 day

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Line of Credit by Rapid Finance

A Line of Credit through Rapid Finance can be a great way to get flexible access to capital right when you need it.

Pros

• Fast approvals for qualified applicants with the initial draw wired as quick as the same day. No competitor payoffs required Minimal documentation required for approval Use as much as you need, only pay fees on what you draw Online customer portal to make draws and access account information

Cons

• Not ideal for startups or low monthly revenue businesses Requires an established business bank account

Funding Amount

$5,000-$250,000

Cost

1.20 Average Factor Rate. Typically a balance fee, fixed fee or other types of fees my be charged depending on the line of credit

Repayment Terms

Amortization can be from 9-24 months*. Term may reset every time you draw on your line of credit

Funding Speed

As Fast as Same Day

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Line of Credit by Headway Capital

Headway Capital provides businesses with a true revolving Line of Credit with no pre-payment penalties, one fixed monthly payment, and the ability to access additional capital any time you have funds available. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Headway a breeze. Only answer a few additional questions on their end and you're good to go.

Pros

• Pre-approval process does not require hard personal credit inquiry
• Approval within hours of applying
• Only pay interest on what you use
• Offers 24-month repayment terms and monthly payments.

Cons

• Interest rates can be higher than some other line of credit providers
• Hard personal credit inquiry at the time of funding.

Funding Amount

$5,000 to $100,000

Cost

3.3% - 6.6% monthly interest rate

Repayment Terms

Monthly repayment for 12, 18 or 24 months

Funding Speed

As fast as the next business day.

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When is a business line of credit a good idea?

Like most business financing options, the best time to get a line of credit for your business is often when your business has healthy revenue and cash flow, rather than when your business is in a cash flow crunch or revenues are dropping. 

You're more likely to qualify for the best terms when your business is in good financial shape and isn’t experiencing financial problems. 

Remember: you're only charged interest on the amount you borrow. If you secure a line of credit now you're not obliged to use it, but it will be available when your business needs some extra capital. However, be sure to factor in any associated fees.

Reasons why a bank might reduce your small business line of credit

It’s possible your lender may reduce your credit limit on your line of credit. This can happen for several reasons:

1. Changes in your credit profile: If a business's credit scores drop, and it starts missing payments, a bank might see the business as a higher credit risk and decide to reduce the credit line.
2. Economic conditions: Lenders often reassess credit lines during economic downturns or uncertain financial conditions. This isn’t necessarily tied to your business specifically; sometimes many customers see their credit limits lowered .
3. Business performance: If a business experiences a decline in revenue, profitability, or overall financial health, a bank might see it as less capable of paying back the existing credit line, leading to a reduction.
4. Regulatory changes: Changes in regulatory requirements or banking policies can also impact the bank's lending decisions, potentially leading to a reduction in a small business line of credit to maintain compliance with regulatory standards.

Rates, fees, and total cost

Costs can vary a lot by lender, but typically they can include:

• Interest rates: Interest rates can vary based on interest rates in the economy (the prime rate), the business's creditworthiness, and the overall financial health of the business. They can range from a few percentage points above the prime rate to much higher rates for riskier borrowers. Generally, interest rates for small business lines of credit typically range from around 7% to 25%, but can be much higher.
• Origination fees: Some lenders may charge an origination fee when a line of credit is first established. This fee can range from 1% to 5% of the total credit line.
• Maintenance fees: Some lenders may charge an annual or monthly maintenance fee for keeping the line of credit open, typically ranging from 1% to 3% of the credit line. (Not all lenders charge these fees.)
• Transaction fees or draw fees: These fees can apply to each draw from the  line of credit and may range from 1% to 5% of the transaction amount.

It's essential for small business owners to thoroughly review and understand the fee structure and terms associated with a small business line of credit before committing to any agreement with a lender.

Secured vs. unsecured business line of credit

There are two basic categories of financing: secured and unsecured loans. 

Secured line of credit

With a secured line of credit, the borrower pledges collateral as a security deposit on the line of credit. This can include business assets owned by the business, such as equipment or inventory, or even personal assets like a home equity line of credit. 

Secured credit lines may be preferred over unsecured lines by a traditional financial institution like a bank or credit union. The lender is taking on less risk, so they may grant a higher credit limit at a lower interest rate for a secured credit line. 

New businesses or businesses with poor business credit might only qualify for a secured line of credit because of the inherently higher risk.

Unsecured line of credit

In contrast to a secured credit line, an unsecured business line of credit does not require collateral. (A personal guarantee may still be required, though.) Unsecured lines of credit can be more expensive because the lender assumes more risk. 

Personal and business credit cards are one example of unsecured lines of credit. Some lenders will require a personal guarantee to help offset a lack of collateral.

Qualification requirements

Every lender is different, but these are some common factors that lenders will often consider:

Credit requirements

• Personal credit scores of 620–650+ may be required
• Business credit history when available
• Credit report without major delinquencies

Business requirements

• 1–2 years in business (some lenders are more flexible)
• Minimum annual revenue (varies by lender, often $50,000–$100,000+)
• Business bank account with regular deposits
• Business entity formation (LLC, corporation) preferred by some lenders

Financial documentation

• Bank statements (typically most recent 3–6 months)
• Financial statements
• Profit and loss statements
• Tax returns (personal and business)

Additional factors

• Industry type (some industries considered higher risk)
• Debt-to-income ratios
• Cash flow patterns

Again, each lender has its own requirements so don’t be intimidated by this list. Rather, think about how you can best position your business for approval. For example, do you need to open a business checking account or catch up on your bookkeeping?

Small business line of credit for startups

It can be hard to find financing for a startup because a new business doesn’t have sales or a business credit history. Still, new businesses can improve their chances by:

1. Building strong personal credit: Lenders may consider the personal credit history of the business owner, especially for startups. Maintaining a good personal credit score can be helpful when you need to get financing.
2. Creating a solid business plan: A well-thought-out business plan that outlines the company's goals, strategies, and financial projections can instill confidence in lenders.
3. Demonstrating revenue and cash flow: If the business has been making money and shows positive cash flow, it may be more attractive to lenders.
4. Exploring alternative lenders: Some alternative lenders specialize in providing financing to startups and new businesses, and they may be easier to get than loans from traditional banks.
5. Offering collateral or personal guarantees: Providing collateral or personal guarantees can enhance the likelihood of approval since it reduces the lender's risk.

A small business credit card may be a helpful alternative for new businesses. Many small business card issuers check personal credit and will accept income from all sources, not just the business. A 0% intro APR may give the business months of interest-free financing. 

Quick business line of credit

A business credit line can provide small and medium-sized businesses with quick access to short-term funding. Some lenders can review and approve applications online, and fund within a day or two. Of course, this depends on the business profile, documentation provided, and the lender’s underwriting process. 

Fast financing options typically require an online application. You may need to link access to your bank account so the lender can review financial information, so make sure you are dealing with a reputable lender. See the list of business lines of credit above to get started.

Frequently asked questions