Business Line of Credit: What It Is and How to Get One

A business line of credit is a type of small-business loan that functions similarly to a business credit card, providing revolving access to business capital. Researching which type of lender is best for you, elevating your credit score as much as possible and keeping strong business financial records can help you qualify for the best business line of credit.

A business line of credit is a revolving source of capital, where you can request draws against a certain credit limit, continue to draw as you pay down the balance and pay interest only on the amount that you’ve used. You can get a line of credit for working capital or to cover startup costs, and they are best for businesses that have short-term needs or cash flow gaps.

Interest rates and fees for business lines of credit vary significantly — anywhere between 10% and 99% — depending on the lender and your business. As is the case with other types of business loans, banks and credit unions, including Small Business Administration lenders, typically offer the most favorable rates and terms, but also have the strictest qualification requirements. Lines of credit from online lenders are typically more expensive, but may be easier to qualify for.

Your approval chances for a business line of credit will vary based on the type of lender, your personal creditworthiness and your business’s finances. Generally, there are some steps you can take to maximize your chances of getting approved for a business line of credit.

1. Understand your financing needs. Business lines of credit are usually best for short-term needs or revolving needs like inventory. To finance something larger and long-term, like a vehicle, you would be better off looking for a term loan. Making sure a line of credit is the best fit for your business can save you a lot of time as you go through the application process, and help you understand what you can afford. 

2. Research your options. Research and compare lenders to see what options make the most sense for your business and funding needs. Generally, you want to look for the lowest rates and most flexible terms you can get. In your research, also consider the funding process and how quickly you can access cash when you make a draw request, as well as any prepayment penalties or inactivity fees. 

3. Understand your qualifications. Though requirements vary by lender, you’ll typically need to have at least a 600 credit score and six months in business. Generally, the higher your revenue and stronger your credit score, the better your chances of approval and favorable terms. If you have large assets or cash to offer as collateral on a secured line of credit, it can also significantly improve your chances and help you access lower rates. 

4. Gather documents. The documents you need to apply for a business line of credit don’t differ much from other types of business loans. You’ll typically be asked for personal and business tax returns, bank statements and business financial statements like a balance sheet and profit and loss statement. It would also be prudent to gather your business plan, business registration or legal documents and information on any collateral you plan to offer.  

Once you’ve been approved for a business line of credit, you can typically start drawing on the line right away. Here’s how the process usually works.

Unlike a term loan, where the capital is disbursed in one lump sum, a line of credit approves a credit limit. That means you don’t have to borrow up to the limit if you don’t need to. Typically, credit lines have higher limits than business credit cards.

Spending on a business line of credit works similarly to a business credit card, only instead of making purchases using a card, you get cash deposited into your business checking account when you draw from the line. The draws that you’ve taken will appear as a balance against your credit limit, like a balance on a credit card. Once you have paid down the balance, you can take draws up to the limit again.

Like a credit card, with a business line of credit, you only pay interest on the unpaid balance. This interest will accumulate over time depending on how long you take to pay off the balance. You can estimate the total cost of borrowing using our business line of credit calculator:

While business credit cards usually have a set payment amount every month that’s based on the outstanding balance, repayment schedules for a business line of credit can be more flexible and customizable to your business’s revenue structure.

Repayment terms can range from three months for online lenders and up to 10 years for some SBA lines of credit.

• If you have good personal credit and still want a revolving source of capital: Business credit cards are a great option as a revolving source of funding, and unlike a line of credit, many will reward you for your spending. However, most business credit cards require strong personal credit — a score of at least 690 — and typically have lower limits than lines of credit. 

• If you need to make a large purchase: Business term loans are typically a more affordable option to finance large purchases like equipment, vehicles or real estate. Term loans are more likely to have lower rates and longer repayment terms, which make them better for long-term financing. 

• If you need to cover gaps in cash flow: To cover consistent cash flow gaps due to your business model, you may consider an option like invoice financing, where unpaid customer invoices become collateral to get short-term loans. This can be an ideal option if your business operates with a lot of invoices because it comes with built-in collateral, which means you won’t be required to secure the funding with anything else.