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A line of credit offers short-term funding, helping small businesses to cover their expenses easily. It is an important financial tool for small businesses because it gives them the benefit of flexibility in accessing funds, which, can be drawn as needed.

A line of credit is ideal for managing the cash flow in the business and handling the expenses.

Lines of Credit help small businesses maintain liquidity and meet operational needs without the burden of fixed repayments.

What is a Line of Credit?

A Line of Credit is a flexible loan with a certain limit from a financial institution or bank that is available for both business clients and personal customers. A business line of credit is renewable, which means that when the borrower makes repayments, the amount of credit available is refreshed.

All lines of credit include the amount to be borrowed when needed, paid back, and borrowed again. Lenders set the interest rate, payment size, and rules. Some lines of credit allow the borrowers to either write checks or issue a debit card which can be further used to access the credit that is available.

Banks approve the borrower based on their credit score or their relationship with the bank, along with other factors. Business lines of credit are generally approved for several months or up to several years, depending on the lender.

Borrowers can ask for a specific amount but are not bound to use the entire amount. Instead, they can tailor their spending from the line of credit to fit their needs, paying interest only on the funds they actually draw rather than on the full credit line.

Additionally, borrowers can adjust their repayment amounts according to their budget or cash flow. They can choose to repay the entire outstanding balance at once or make the minimum monthly payments. If the borrower offers an asset they own as collateral for a line of credit, they’ll pay a lower rate. In the case of default, having collateral gives the lender something to reclaim.

Examples of Line of Credit

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit are common secured lines of credit backed by the home’s market value minus what is owed. The credit limit is 75% to 80% of this value. They usually have a 10-year draw period, allowing borrowing and repayment, after which the balance is due or can be extended. The closing costs generally include appraisal fees.

Securities – Backed Line of Credit (SBLOC)

A Securities-Backed Line of Credit (SBLOC) is a secured-demand loan where the borrower’s securities serve as collateral. The investors can generally borrow 50% to 95% of their asset value, but the funds cannot be used for securities purchases.

Business Line of Credit

Businesses use lines of credit for flexible borrowing rather than fixed loans. Financial institutions consider market value, profitability, and risk to determine the Line of Credit amount, which may be secured or unsecured. The interest rates on Line of Credit typically vary.

Demand Line of Credit

A Demand Line of Credit is a type of loan that can be secured or unsecured but is rarely used. With a demand line of credit, the lender can require repayment at any time. The payments can be interest-only or include principal, based on the LOC terms. Borrowers can draw up to the credit limit whenever needed.

Personal Line of Credit

A Personal Line of credit gives access to unsecured loans that can be repaid and borrowed again. For opening a personal line of credit, one needs a credit history with no defaults, a credit score of 690 or higher, and a reliable income.

Benefits of a Business Line of Credit

Benefits of a Business Line of Credit

Cash on Demand

A Business Line of Credit provides access to funds whenever the business needs it. So, the business can borrow money to fulfill its short-term business needs without any hassle.

Building Business Credit

By using a revolving credit line and making timely payments, your business can build a strong credit history, improving your chances of securing credit based on your company’s performance.

Separation of Personal and Business Finances

A business line of credit is used for business purposes and helps streamline and track company expenses, ensuring clear financial boundaries.

Flexible Usage

A business line of credit offers greater flexibility, allowing businesses to use the funds for various needs, such as purchasing inventory or covering payroll.

Flexible Repayment Options

A revolving line of credit offers more flexible repayment options, so if your business experiences a slower month, you can opt to pay only the minimum amount due.

Types of Business Line of Credit

Unsecured vs. Secured Lines of Credit

Secured Lines of Credit

A secured line of credit is the one in which the borrower uses an asset, usually a car or home, as collateral to secure the loan.

If the borrower is unable to repay the debt, the lender can take the asset, because of the asset, creditors and banks offer higher spending limits, lower interest rates, and better terms on secured lines of credit.

Examples of secured lines of credit

  • Prepaid credit cards: Customers use prepaid credit cards, but it’s hard to get a card with more than $500 in it. So, you can buy multiple cards.
  • Home equity line of credit (HELOC): Money spent on home improvement projects is widely used and is a good investment.
  • Life insurance loans: You can borrow against whole life insurance policies and then can easily use the money for whatever you want.
  • Pawnshop loans: Pawnshop loans can provide quick cash, but you risk losing cherished possessions if you can’t repay them in time.

Unsecured Lines of Credit

An unsecured credit line is one in which a lender assumes greater risk because no assets are subject to seizure upon default.

Businesses need a solid financial profile in order to get an unsecured business line of credit. There are some personal lines of credit lenders who offer benefits such as flexible repayment schedules, lower interest rates, etc.

Examples of unsecured lines of credit

  • Personal loans: Personal loans are used in big projects or one-time purchases, such as for a home appliance.
  • Payday loans: Payday loans must be paid immediately as they are for emergency debts.
  • Credit cards: Credit cards can be used for daily purchases.
  • Peer-to-peer loans: The peer-to-peer loans are usually unregulated friend-to-friend loans.
Secured Lines of CreditUnsecured Lines of Credit
Collateral requiredThe secured line of credit requires collateral.The unsecured line of credit does not require collateral.
UsageIt is used for larger, long term financial needs.It is used for small, short term financial needs.
Repayment termsThe repayment terms are more flexible.There may be stricter terms and conditions.
ExamplesHELOC, auto-secured lines.Personal lines of credit, credit cards.

Revolving vs. Non-Revolving Lines of Credit

Revolving Lines of Credit

Revolving line of credit allows you to borrow, repay, and borrow again as needed, up to a predetermined limit.

Once you repay the amount you’ve used, your credit line replenishes, providing ongoing access to funds. This flexibility is ideal for managing variable expenses, such as payroll or inventory.

Non-Revolving Lines of Credit

A non-revolving line of credit offers a fixed amount of credit that does not renew once used and repaired.

Once the total amount is borrowed and repaid, the account is closed, and no further funds can be accessed. Non-revolving credit is more suitable for one-time expenses or specific projects.

Revolving Lines of CreditNon-Revolving Lines of Credit
Access to fundThe funds can be drawn repeatedly , up to the credit limit.The funds are limited to the initial amount borrowed.
Interest RateThe interest rate is higher. The interest rate is lower.
Interest ChargesThe interest is charged on only applied to the outstanding balance. The interest is charged on the entire borrowed amount.
Borrowing powerIt generally offers lower credit limits.The borrower may qualify for large loan amounts.

How Does a Business Line of Credit Work?

When you apply for a credit line, you’re approved to borrow up to a specific limit. You can decide how much to withdraw and when to do so; you can use all or just a portion of the available amount.

As you borrow from your credit line, you’ll pay back the loan over time. You only pay interest on the amount you’ve borrowed, not on the entire credit line. Additionally, as you pay down the principal, that amount becomes available for you to borrow again.

You can borrow as often or as much as you like, up to the limit. There are various methods available for accessing your credit line, including using a debit card.

Top 15 Business Line of Credit Providers for Small Businesses in USA

Chase Bank

Chase Bank offers a business line of credit to small businesses that helps them ensure the business handles unexpected expenses, manages cash flow and purchases inventory along with flexible access to capital.

Chase supports small businesses that are getting SBA loans and participates in programs such as SBA 7(a) loan programs, SBA 504 Loan Program, etc.

Chase’s business lines of credit offer flexibility, allowing small businesses to cover operational expenses without applying for a new loan each time.

Key Features of Chase’s Business Line of Credit for Small Business

  • Interest Rate: The standard annual percentage yield (APY) for basic savings accounts is very low at approximately 0.01%.
  • Max Loan Amount: The maximum loan amount is $500,000.
  • Credit Score Required: Businesses are required to have a credit score of 650 or higher.
  • Repayment Terms: The borrowers can usually pay within 12 to 24 months, with automatic renewal options if the business remains in good standing.

Bank of America

Bank of America offers a business line of credit to provide small businesses with flexible access to working capital and cover short-term expenses like inventory, payroll, and seasonal cash flow needs.

Small Businesses can also participate in SBA (Small Business Administration) loan programs, offering government-backed options with favourable terms.

Bank of America flexible financing options make it easier for small businesses to manage cash flow and seize growth opportunities.

Key Features of Bank of America’s Business Line of Credit for Small Business

  • Interest Rate: The interest rate may vary depending on creditworthiness, the business’s overall relationship with the bank, and the line amount.
  • Max Loan Amount: There is no maximum loan amount.
  • Credit Score Required: Businesses are required to have a credit score of 720 (FICO® Score)  or higher.
  • Repayment Terms: The borrowers can usually pay within six months to 25 years.

Wells Fargo

Wells Fargo offers a business line of credit designed to give small businesses access to the working capital, handle short-term expenses, like buying inventory, covering cash flow gaps, or paying employees.

They also provide SBA-backed loans, which come with more favorable terms, helping businesses grow with greater financial flexibility. Wells Fargo is a good choice for small businesses needing flexible financing options.

Key Features of Wells Fargo’s Business Line of Credit for Small Business

  • Interest Rate: The interest rate ranges from 0.25 percent to 18.25 percent.
  • Max Loan Amount: The maximum loan amount is $5 million ( if businesses generate income in million dollars).
  • Credit Score Required: Businesses are required to have a credit score of 680 (FICO® Score)  or higher.
  • Repayment Terms:

American Express

American Express offers a Business Line of Credit designed to provide small businesses with fast and flexible access to capital for short-term needs, like managing cash flow, covering payroll, or purchasing inventory.

American Express aimed to provide businesses with rapid funding with simple, transparent terms, making it easier to manage immediate financial needs.

Key Features of American Express’s Business Line of Credit for Small Business

  • Interest Rate: The interest rate ranges from 3.00% to 18.00 ( depending on term lengths).
  • Max Loan Amount: The maximum loan amount is $250,000
  • Credit Score Required: Businesses must have a credit score of 660.
  • Repayment Terms: The borrowers can usually pay within 6, 12, 18, or 24 months. 

Capital One

Capital One gives Business Line of Credit to small businesses for regular functioning or a particular purpose and provides access whenever needed.

Capital One is best for small businesses because it allows for continuous, easy, revolving credit that provides quick business overdrafts for flexibility, with easy qualifying and management.

Key Features of Capital One’s Business Line of Credit for Small Business

  • Interest Rate: The interest rate varies based on the credit profile of the applicant/business.
  • Max Loan Amount: The maximum loan amount is $ 5,000,000.
  • Credit Score Required: Businesses must have a credit score of 155.
  • Repayment Terms

U.S. Bank

The U.S. Bank offers a Business Line of Credit to help small businesses manage short-term financial needs like covering operational expenses, purchasing inventory, or bridging cash flow gaps.

U.S. Banks provide access to SBA-backed loan programs, which come with more favorable terms for qualified businesses by reducing the bank’s risk, making it easier for businesses to secure the funding they need.

Key Features of U.S. Bank’s Business Line of Credit for Small Business

  • Interest Rate: The interest rate varies based on the credit profile of the applicant/business.
  • Max Loan Amount: The maximum loan amount is $ 250,000.
  • Credit Score Required: The credit score is not disclosed.
  • Repayment Terms: The borrowers can usually pay within 5 years.

PNC Bank

The PNC Bank offers a Business Line of Credit to give small businesses access to capital and let them prepare for changing needs.

PNC Bank provides funds to small businesses between $20,000 and $100,000 seeking unsecured lines of credit and credit amounts from $100,001 and up seeking a secured line of credit.

Key Features of PNC Bank Business Line of Credit for Small Business

  • Interest Rate: The interest rate varies based on the prime rate.
  • Max Loan Amount: The maximum loan amount is $ 100,000.
  • Credit Score Required: Businesses must have a credit score of 660.
  • Repayment Terms: The borrowers can usually pay within 5 to 20 years.

TD Bank

TD Bank offers a Business Line of Credit to give small businesses access to cash for expenses that can be paid off, such as inventory or payroll.

Businesses can enjoy flexible terms and preserve capital with an SBA loan from TD Bank.

Key Features of TD Bank Business Line of Credit for Small Business

  • Interest Rate: The interest rate is 8.74%. 9.24% APR (approx).
  • Max Loan Amount: The maximum loan amount is $500,000.
  • Repayment Terms: The repayment term is not disclosed by the bank.

Fundbox Bank

Fundbox Bank offers a Business Line of Credit to small businesses, giving them flexible access to funds that can be used to optimize cash flow or and cover expenses like insurance, marketing campaigns, payroll, and more.

Fundbox Bank’s online application process does not impact the credit score. After the application is approved, the funds will arrive in the bank account by the next business day.

Key Features of Fundbox Bank Business Line of Credit for Small Business

  • Interest Rate: The interest rate starts at 4.66% for 12-week terms and 8.99% for 24-week terms, but it may vary for each customer over time.
  • Max Loan Amount: The maximum loan amount is up to $150,000.
  • Credit Score Required: Businesses must have a credit score of 600+ personal (FICO) score.
  • Repayment Terms: The repayment plan is flexible from 12-week terms to 24-week terms.

BlueVine Bank

BlueVine Bank offers small businesses a line of credit with funds available in as fast as 24 hours with simple interest rates.

Businesses can use the line of credit to stock up inventory, cover payroll, hire employees, or buy materials or equipment.

Key Features of BlueVine Bank Business Line of Credit for Small Business

  • Interest Rate: The interest rate starts from 7.8%.
  • Max Loan Amount: The maximum loan amount is up to $250,000.
  • Credit Score Required: Businesses must have a credit score of 625+ personal (FICO) credit score.
  • Repayment Terms: The repayment plan is 6 or 12 months.

OnDeck Bank

OnDeck Bank provides a business line of credit to small businesses, giving them access to funds to cover business-related expenses.

Borrowers can easily monitor their loans, check account balances and transaction histories, make payments, and contact customer service through OnDeck.

Key Features of OnDeck Bank Business Line of Credit for Small Business

  • Interest Rate: The interest rate starts from  35.90%.
  • Max Loan Amount: The maximum loan amount is up to $100,000.
  • Credit Score Required: Businesses must have a credit score of 625 personal FICO® score.
  • Repayment Terms: The repayment plan is flexible for 12, 18, or 24 months.

CAPLines 

CAPLines is a program designed to assist small businesses with their short-term and cyclical working capital requirements.

CapLines provides substantial government-backed credit lines for small businesses, helping those with significant capital needs. The different types of CAPLine are Seasonal, Working, Contract, and Builders CAPLine.

Key Features of CAPLines Business Line of Credit for Small Business

  • Interest Rate: The interest rate varies from 2.25% to 4.25%.
  • Max Loan Amount: The maximum loan amount is up to $5 million.
  • Credit Score Required: Businesses must have a personal credit score of 660.
  • Repayment Terms: The repayment plan is 1 to 10 years.

Truist 

Truist offers a Business Line of Credit to help small businesses by providing flexible access to funds for managing cash flow, handling short-term financial needs, or purchasing inventory.

Truist provides access to programs such as the SBA 7(a) loan to small businesses.

Key Features of Truist Business Line of Credit for Small Business

  • Interest Rate: The interest rate varies as per the terms of the line of credit.
  • Max Loan Amount: The maximum loan amount is up to $100,000.
  • Credit Score Required: The credit score is not disclosed by the bank.
  • Repayment Terms: The repayment plan is (from 12 to 36 months.

Kabbage

Kabbage offers small businesses a Business Line of Credit to manage cash flow and handle expenses or investments. Kabbage is now part of American Express.

Kabbage offers flexible funding options, fast processing, and low barriers, making it ideal for small businesses needing efficient access to working capital.

Key Features of Kabbage Business Line of Credit for Small Business

  • Interest Rate: The interest rate starts from 0.95%.
  • Max Loan Amount: The maximum loan amount is up to $250,000.
  • Credit Score Required: The business should have a FICO score of at least 660.
  • Repayment Terms: The repayment plan is flexible for 6,12, 18, or 24 months.

Lendio

Lendio is a lending marketplace that helps small businesses connect with a variety of lenders offering business lines of credit.

Lendio’s platform helps small businesses access various loan options through a single application, providing a flexible solution for managing cash flow, purchasing inventory, or covering short-term expenses.

Key Features of Lendio Business Line of Credit for Small Business

  • Interest Rate: The interest rate starts from 8%.
  • Max Loan Amount: The maximum loan amount is up to $500,000.
  • Credit Score Required: The business should have a score of at least 660.
  • Repayment Terms: The repayment plan is for 1-2 years.

When should you use a line of credit, and when should you not?

When to use Line of Credit

A business should be use a line of credit when they are focused on below mentioned reasons:

Financing Short-Term Projects

A line of credit is ideal for short-term projects needing immediate funding that offers quick returns. This financing option enables businesses to pursue these projects without depleting their cash reserves.

  • Marketing Campaigns

It is expensive to launch a new marketing campaign in order to boost sales or promote a new product. A line of credit can fund these campaigns, allowing the business to achieve its target audience and generate increased revenue.

  • Inventory Purchases

Businesses use lines of credit to purchase inventory, take advantage of bulk purchasing discounts, or prepare for a seasonal surge. This ensures that they have the stock needed to meet customer demand and capitalize on sales opportunities.

Managing Cash Flow

The primary use of line of credit is managing cash flow.Many businesses experience changes in revenue, which can create cash flow gaps. A line of credit can help bridge financial gaps, allowing the business to cover its operating expenses without interruption.

  • Accounts Receivable Gaps

Businesses frequently experience delays between delivering services or products and receiving payments from customers. A line of credit can help cover operational costs during these waiting periods, ensuring seamless business operations.

  • Cyclical/Seasonal Businesses

A Line of Credit helps businesses with cyclical revenue, such as tourism-related retail stores, to maintain operations during off-peak seasons. It gives the required funds to pay for inventory, salaries, and other expenses until revenue boosts during the peak season.

Covering Unexpected Expenses

Businesses face financial stability due to unexpected expenses. A line of credit helps the business to cover its unforeseen costs without disrupting the overall financial plan.

  • Market Changes

The budget gets affected due to sudden changes in the market, such as increased costs for raw materials or unexpected regulatory expenses. A line of credit offers flexibility to manage changes effectively.

  • Emergency Repairs 

There could be equipment breakdowns or property damage that can need immediate attention and funds. A line of credit ensures that the business can address these emergencies promptly, handling productivity and service quality.

Flexibility and Convenience

A line of credit provides flexibility compared to other financing options. Businesses can borrow any amount they need and only pay interest on the amount borrowed. This makes it a convenient choice for managing both expected and unexpected financial requirements.

  • Interest Savings

Businesses save a lot on interest costs as only interest is charged on the borrowed amount.

  • Avoiding Multiple Loan Applications

Businesses can utilize a line of credit for various expenses rather than applying for multiple short-term loans. This approach decreases administrative burdens and accelerates access to funds.

When not to use Line of Credit 

A line of credit could be an effective financial tool for companies, but there are several scenarios in which it would not be a good idea.

Long-Term Financing Needs

A line of credit is intended for short-term financial needs and managing cash flow. It may not be suitable for long-term financing, as interest rates are often higher than those of traditional loans, and the revolving nature of the credit can lead to prolonged debt.

  • Real Estate Purchases: Investing in commercial property is a significant long-term decision that generally requires substantial capital. For these purchases, traditional term loans or commercial mortgages with fixed interest rates and structured repayment plans are advisable.
  • Large Capital Investments: Investments in machinery, technology, or infrastructure are best financed through term loans or equipment financing. These options provide favorable terms and fixed repayment schedules, reducing the risk of incurring high-interest debt.

High-Interest Debt Consolidation

Using a line of credit for debt consolidation can be risky, especially if it carries a variable interest rate.

While consolidating high-interest debts into a lower-interest line of credit may seem beneficial, the variable rate can lead to unpredictable interest costs over time.

  • Debt Consolidation Loans: These loans are specifically designed for consolidating debt, offering fixed interest rates and structured repayment plans. They provide a clear path to paying off debt without the risk of rising interest rates.
  • Personal Loans: For smaller debt consolidation needs, personal loans with fixed interest rates can be a more predictable and manageable option.

Inconsistent Revenue Streams

Businesses with unpredictable or inconsistent revenue streams may find it difficult to manage a line of credit. A line of credit’s flexibility requires disciplined repayment, and irregular revenue can make it challenging to meet payment obligations, resulting in higher interest costs and potential financial strain.

  • Startups: New businesses often experience fluctuating revenues while establishing themselves in the market. Until a stable revenue stream is developed, relying on a line of credit can be risky.
  • Volatile Industries: Companies in industries with significant revenue volatility, such as entertainment or commodities trading, should consider more stable financing options that align with their cash flow patterns.

Key Signs to Avoid a Line of Credit

Key Signs to Avoid a Line of Credit

It is not necessary that a Line of Credit is a good choice for your business. So, in case your business has any of the below-mentioned features, then you should look for alternative financing options:

  • Unstable Cash Flow: Those businesses with highly unpredictable cash flow may struggle to handle the flexible repayment terms of a line of credit.
  • High Existing Debt: In case the business already holds significant debt, adding more through a line of credit can worsen financial strain.
  • Long-Term Financial Needs: For long-term investments and significant capital expenditures, traditional loans with fixed terms and lower interest rates are more suitable.
  • Lack of Repayment Plan: If your business is using a line of credit without any repayment plan, then debt and interest costs will be escalated.

Pros and Cons of Line of Credit

Pros of Line of Credit

  • It is potentially great for small businesses to finance projects that have unclear costs.
  • Businesses get access to instant, ongoing funds.
  • The Line of Credit can be secured or unsecured.
  • Line of Credit is very much similar to credit cards but with lower interest rates.

Cons of Line of Credit

  • The interest rate varies and makes it difficult for small businesses to predict your costs.
  • Line of Credit are often harder to qualify for than personal loans.
  • To secure more competitive rates, we need to provide collateral.
  • Lines of credit can carry a number of fees and confuse borrowers.

Issues with Line of Credit

Borrowers with poor credit scores face issues getting approval for the product. They also need to make sure that they are capable of making the repayment easily and without any hassle.

Some financial institutions and banks charge maintenance fees monthly or annually, even when borrowers don’t use a line of credit, and a transaction fee when they draw money. The interest gets accumulated when the money is borrowed.

Some borrowers find the interest calculation quite complex because the line of credit can be drawn and repaid on an unscheduled basis. In case the borrower takes the personal line of credit, the cost of borrowing will become expensive for them.

Conclusion

Lines of credit offer both advantages and disadvantages based on usage. Consumers and businesses often utilize credit for large purchases and investments.

Borrowers must be approved by a lender to obtain a line of credit. They can access funds multiple times, up to their credit limit, as long as they make minimum payments.

FAQs

How Do I Qualify for a Line of Credit?

In order to qualify for a Line of Credit, the borrowers need to meet the lender’s standard, including sufficient income, minimum credit score, and other factors.

What Are Common Types of Lines of Credit?

The common types of Lines of Credit are business, personal, and home equity.

How Does an LOC Affect My Credit Score?

Lenders run a credit check when you apply for a Line of Credit, which includes the credit report, which lowers your credit score in the short term. Your credit score will decrease if you tap into more than 30% of the borrowing limit.

How Do I Pay Back a Line of Credit?

You repay a line of credit by making the minimum monthly payment to the lender. Borrowers receive a bill each month outlining their advances, interest, and fees, along with the entire balance to be paid off once a year.