How Does a Business Line of Credit Work?
While business lines of credit haven’t really changed since we first wrote this guide, we reworked this whole article to make it easier to find the information you want.
Wondering how a business line of credit works? We get you. After all, you’ve probably never had a personal credit line, and business lines of credit aren’t so straightforward as business term loans.
But once you understand business credit lines, you’ll see how they offer a very flexible type of financing―making them one of our top-recommended kinds of working capital.
So in this guide, we’ll tell you all the nitty-gritty details about how business lines of credit work, what business situations they work best for, and how you can get one for your business.
How does a business line of credit work?
A business line of credit is what’s called revolving credit, meaning you can use it over and over rather than just once (like you would with a term loan). Here’s how that works:
First, you have to get approved for your business line of credit. When you get approved, you’ll get a certain credit limit―or the amount of money you can borrow. Your business’s credit limit will depend on things like your lender and your borrower qualifications (such as credit score and revenue).
Then you can borrow against your credit limit. Now, you don’t have to borrow your maximum amount. If you have a $50,000 credit limit, for example, you can draw $10,000 one day and another $5,000 a few days later. (These transactions are often called draws from your credit line.) Or, yes, you can borrow the whole $50,000 at once.
Either way, whatever amount you borrow becomes its own term loan, with its own interest rate, fees, and repayment term. So if you do multiple draws, you basically have multiple term loans.
While many lenders let you repay your credit draws with monthly payments, some lenders insist on weekly or even daily payments.
But unlike normal term loans, once you pay those draws back, the money becomes available again. So if you borrow $10,000 from your $50,000 credit line, you’ll have another $40,000 you can borrow. But once you’ve repaid that $10,000, you’re back up to $50,000. And there’s no need to get re-approved to borrow more. (Some credit lines do expire, so you’ll need to eventually get re-approved.)
That makes business lines of credit a great kind of working capital to have on hand. If you’ve got an established credit line, you can quickly borrow funds without needing to go through a loan approval process. And since you can make draws of many sizes, you can use your credit line to take care of smaller and larger business expenses.
Business line of credit costs
Of course, like any kind of business financing, small-business lines of credit don’t come free.
Your line of credit will have either an interest rate or a fee schedule (depending on your lender). This only applies to money you’ve drawn. If you don’t borrow anything, you don’t owe any interest.
Depending on your lender, your draws may also come with individual origination fees (because again, you’re basically taking out individual term loans). You may also face prepayment penalties for repaying your draws before schedule.
Your lender may also charge an annual fee for your small-business line of credit. Unlike the other fees we mentioned, this fee will apply whether or not you actually use your credit line. So if you plan to get a business credit line just in case, make sure you know what kind of annual fee you’ll have.
Business line of credit vs. business loan
So how does a business line of credit compare to a normal term loan?
Well, like we already mentioned, a normal business loan is a one-time thing. You get and use your funds, and then you have to re-apply for another loan if you need more money.
A credit line, on the other hand, lets you borrow over and over again without going through a pesky loan application process.
With that in mind, a revolving line of credit can work for pretty much any business expenses that come up, from payroll needs to inventory purchases to business improvements and even some equipment purchases. But generally, you’ll have a specific business need in mind when you apply for a term loan.
Business line of credit vs. business credit card
You might also think a business credit line sounds pretty similar to your credit card―and you’re not wrong. They’re both types of revolving credit.
The big differences? Well, a business credit card usually has a much lower credit limit than a business line of credit. Likewise, business credit cards generally have higher interest rates than credit lines do.
That means that business credit cards work better for small day-to-day expenses, like team lunches, office supply runs, and so on. Business credit lines work better for larger cash flow needs, like bigger purchases, hiring, and business improvements.
(For more details, we’ve got a breakdown of lines of credit vs. credit cards.)
Pros and cons of business lines of credit
So now that you understand how business lines of credit work, should you get one? Maybe―but let’s make sure you understand the pros and cons of this type of business financing first.
As we’ve told you, credit lines can work for many kinds of working capital needs. They’re very versatile compared to other financing options. That makes them a great fit for all kinds of businesses, from online stores to B2B businesses to medical offices.
And of course, your business will be able to draw from your credit line over and over again. That makes small-business lines of credit way more convenient than applying for a term loan (or other types of business financing) over and over again whenever you need more money.
Since you don’t have to re-apply, business lines of credit often offer faster funding than other types of business loans. You can often get cash the same day you make a draw (or the next day at the latest). In fact, some lenders even give you a card that works just like a debit card, so you can make instant draws in stores. In comparison, many term loans take several days to appear in your bank account.
But lines of credit aren’t all gravy.
First of all, depending on your lender, business lines of credit can get expensive. Online lenders often offer accessible credit lines, for example, but they come with higher interest rates than lines from traditional lenders (that is, banks or credit unions). Likewise, if your credit line has an annual fee or origination fees, you may end up paying way more than you’d like in fees alone.
(Still, lines of credit tend to be cheaper than things like merchant cash advances, invoice factoring, and even many short-term loans.)
And then there’s the difficulty of getting a line of credit in the first place. Online lenders have made them more accessible, yes, but lines of credit aren’t always the easiest to qualify for. (We’ll discuss this more in just a minute.) So if you have a low credit score or a very young business, for example, you may have trouble getting approved.
On the whole, though, we think the pros of business credit lines outweigh the cons.
Browse hundreds of loan options, custom-tailored to your business and budget needs, from a single, simple platform.
How to get a business line of credit
So how do you actually get a credit line for your business? Well, you’ll have to meet the minimum borrower requirements and find the right lender.
Business credit line borrower requirements
Like we mentioned, business credit lines don’t have the lowest borrower requirements out there.
To get a business line of credit from an online lender (a.k.a. an alternative lender), you’ll usually need to meet the following qualifications:
- 600 personal credit score
- $100,000 in annual revenue
- 1 year in business
Sure, those requirements vary a bit from lender to lender. But in most cases, that’s the minimum you need to get approved. (Remember, though, that meeting the bare minimum doesn’t guarantee you a credit line.)
And if you want to avoid the higher interest rates of online lenders, you’ll need to meet even stiffer requirements to get considered for a line from a traditional lender:
- 680 personal credit score
- $200,000 in annual revenue
- 2 years in business
Again, note that your lender may demand even more of you before you get approved.
Where to get a business line of credit
So which lenders work best for business lines of credit?
We’ve found that these five lenders work the best for most businesses, thanks to their mix of borrower requirements, rates and fees, and customer reviews.
Compare the best business lines of credit
Min./max. line of credit
Lowest listed rate
Min. revenue requirement
|8% interest||$50,000/yr.||Apply Now|
Fundera by Nerdwallet
Up to $150,000
4.66% draw rate
Data effective 9/28/21. At publishing time, amounts, rates, and requirements are current but are subject to change. Offers may not be available in all areas.
Business line of credit FAQ
Can you get business lines of credit without a personal guarantee?
In most cases, you’ll need to sign a personal guarantee to get a business line of credit. We’re not saying it’s impossible to find a lender who won’t require one―but it’s pretty unlikely.
Does a business line of credit show up on my credit report?
Your business line of credit may show up on your credit report, but it really depends on your lender. Not all lenders report to credit bureaus.
One way to make an educated guess? Credit lines with interest rates are more likely to show up on your credit report than credit lines with draw fees or factors fees.
But if you’re not sure, just ask your lender.
Is it hard to get a business line of credit?
It can be difficult to get a business line of credit if you go through a traditional lender (a bank or credit union). They’ll usually have pretty stiff application requirements for credit lines. But online lenders also offer credit lines, and they have much lower borrower requirements.
How long is a business line of credit good for?
The length of your business line of credit draw period depends on your lender. Some lenders limit you to one year, or maybe two or even five. Other lenders let you use your credit line pretty much indefinitely―but they can call it in (close it and require repayment) at any time.
For small business owners, a line of credit offers a flexible and fast financing option. As a kind of revolving credit, a credit line can help you meet all sorts of working capital needs, no matter what industry you’re in.
So while you do need to watch for potentially high rates and fees, and you’ll have to meet the borrower requirements to get one, we recommend business lines of credit as one of the best kinds of business financing available.
Not convinced you want a business line of credit? Learn more about other types of financing in our guide to the best small-business funding options.