If you’re a small business owner, you know how essential it is to have enough capital to meet your company’s demand. However, financial issues are frustratingly common. According to the Federal Reserve Bank of New York’s Small Business Credit Survey, nearly two-thirds of small business owners reported having financial challenges during the past year.
Applying for a business line of credit can be a smart solution to your problem. With this approach, you get access to a revolving line of credit that you can use to buy inventory, purchase new equipment, or increase your cash flow.
However, it’s important to know that interest rates can vary widely on business lines of credit. It’s a good idea to do your homework on your needs and what rates lenders are offering so you can select the most affordable option for you.
Current business line of credit rates
| Lender Type | Interest Rates | Term | Credit limit |
SBA lines of credit | As low as Prime Rate + 2.25% | Up to 10 years | Up to $5 million |
Traditional banks | As low as 6.50% | Typically up to five years | Up to $500,000 |
Online lenders | 15% to 90% | 6 to 24 months | Up to $500,000 |
Typical rates and terms as of March 2023. Rates and terms vary by lender and are subject to change.
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What is a business line of credit?
Unlike a small business term loan that gives you access to a lump-sum amount of cash, a small business line of credit is a form of revolving credit, much like a credit card. A business line of credit gives you continued flexibility to take advantage of opportunities as they pop up, since you can borrow the money you need over and over again.
Some business lines of credit— but not all— offer lower interest rates than that of most business credit cards.
You only pay interest on the amount you actually use, but business lines of credit tend to have annual fees, origination fees, or even monthly maintenance fees. They’re offered by traditional banks and online lenders. There are several SBA loans that are lines of credit. Business lines of credit can be unsecured or secured. Unsecured business lines of credit require no collateral, and that means they may have higher interest rates. Secured credit cards require collateral which may be in the form of hard assets such as real estate or equipment, or other assets such as accounts receivables.
How to get the best business line of credit interest rates
Each lender will have its own qualifying criteria for business lines of credit. Lenders will review your application and many will consider at least several of the following seven factors when determining whether you qualify, as well as your interest rate:
1. Business revenues
Lenders want to see that you’re running a viable business, and will review your company’s finances before making a decision and determining your interest rate. They will look to see if your business is profitable and what your annual revenues are. Strong revenues can help you secure lower interest rates. Tax returns, financial statements and/or business bank statements may be required to verify business income.
Make sure you use a business bank account to document revenues.
2. Prime Rate
Many lenders use the Prime Rate as the basis of the interest rate they charge. Variable rates will often be prime plus an additional rate. Higher risk borrowers will be charged a higher rate.
As of March 23, 2023, the U.S. Prime Rate is 8%, and it may change again if the Fed raises interest rates again in 2023.
3. Personal credit score
Even though you’re applying for a business line of credit, many lenders will review your personal credit history. According to Experian — one of the three major credit bureaus — a personal credit score of 700 or above is generally considered good and will help you snag the lowest interest rates on a loan. (Most personal credit scores range from 300— 850.)
Some lenders have lower minimum credit score requirements, but those that lend to borrowers with fair or poor credit, interest rates are usually high.
4. Business credit
Along with personal credit scores, lenders may also review business credit reports and/or business credit scores. Some lenders may simply review a business credit report for red flags such as late payments.
5. Financing speed
Low-interest business lines of credit are available, often through traditional lenders such as banks. An increasing number of online lenders are offering lines of credit, some of which may offer competitive rates. Understand, though, that if you need money fast, you may pay a premium for that convenience.
6. Industry
The industry in which your business is in may affect the loans and/or rates for which your business qualifies. Industry is usually tied to a SIC or NAICS code. If businesses in your industry tend to struggle with on-time payments. you’ll have a tougher time finding a loan with competitive interest rates because you pose more of a risk to the lender. For example, construction businesses, restaurants, and bakeries have very high failure rates, and businesses in those fields often struggle to find lower-cost funding.
7. Time in business
How long your business has been in operation can have an impact on whether you qualify, as well as interest rates. New businesses will find it harder to get funding. Many lenders prefer to lend to established businesses that have been in operation for at least two years. It can be challenging to find startup financing.
Business lines of credit options
If you’re ready to apply for a business line of credit, it’s a good idea to shop around to get the best rates and terms for which you qualify. Here are several options. Note that in some cases rates are expressed as fees, not as an APR. You can use business loan calculators to help compare costs.
Small Business Administration Business Line of Credit Rates
The Small Business Administration (SBA) offers four distinct options under its CAPLines program:
- Contract Loan
- Seasonal Line of Credit
- Builders Line
- Working Capital Line of Credit
Through the CAPLines program, businesses can borrow up to $5 million to meet short-term business and cyclical working capital needs with repayment terms as long as 10 years.
Interest rates on SBA lines of credit tend to be quite low. CAPLines carry the same maximum rate as 7(a) loans. Find current SBA loan rates here.
Personal guarantees are required from each owner holding 20 percent or more of the business, and you’ll need good to excellent personal credit to qualify. Only for-profit businesses are eligible; non-profit organizations and religious institutions do not qualify.
Business line of credit options
In addition to traditional financial institutions such as banks and credit unions, these online lenders provide financing options:
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
Cost
Repayment Terms
Funding Speed
Line of Credit by OnDeck
Product Updates: No More Monthly Maintenance Fee! Monthly Payments and Extended Repayment Terms (18 and 24 month terms) NOW 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
Cost
Repayment Terms
Funding Speed
Tips for comparing commercial lines of credit
Interest rates aren’t the only factor you’ll want to consider when comparing lines of credit. Here are several basic terms you’ll need to understand when comparing this type of financing:
Draw period: This is the time period during which your business may draw against the available line of credit. The lender may extend the draw period or require the business to begin repayment (and no longer draw against the line of credit.)
Interest-only: Some loans require interest-only payments during the draw period. After that period of time, the amount must be repaid over a specific period of time.
Origination fee: Some lenders will charge a fee when the loan is made. It may be a percentage of the loan amount or a flat fee.
Prepayment penalty: Some lenders may charge a penalty for paying the loan early.
Frequently asked questions
What is the typical interest rate on a business line of credit?
Business lines of credit rates vary widely depending on the type of lender and borrower qualifications. Borrowers with good credit, strong revenues and at least two years in business may qualify for rates in the single digits or low teens.
Do you pay interest on a business line of credit?
Yes, once you borrow against the line of credit you must pay interest. Sometimes that will be interest-only payments, while at other times you will be required to make payments to cover interest and principal over the repayment period of the loan.
Getting financing for your business
Business financing can provide your business with the funds it needs to survive cash flow fluctuations as well as to grow. However, it’s easy to get overwhelmed by small business loan options. Nav can help with customized lending recommendations for your business based on your business qualifications.
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Gerri Detweiler
Education Consultant, Nav
Gerri Detweiler, a financing and credit expert, has been featured in 4,500+ news stories and answered 10,000+ credit and lending questions online. In addition to Nav, her articles have appeared on Forbes, MarketWatch, and Startup Nation. She is the author or co-author of six books, including Finance Your Own Business, and she has also testified before Congress on consumer credit legislation.