What Is a Business Line of Credit? How It Works and When To Use It
Written by
Jacob Wade
Edited by
Melanie Grafil
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If you are running a business, you might be researching how to get additional funding to help your business grow. Between small business loans, credit cards and lines of credit, it’s hard to know which to choose.
A business line of credit is a revolving credit line that allows you to borrow as much as you need, only pay interest on what you take out, and quickly access funding when needed. Here’s everything you need to know about a business line of credit and when you should consider getting one.
How a Business Line of Credit Works
Unlike a term loan, which is a lump sum of money with fixed payments and an amortization schedule, a business line of credit provides the money you can borrow on an ongoing basis. Much like a credit card, you can use the amount of credit that is needed, then pay only for what you use.
When you apply for a business line of credit, the lender reviews your business revenue, credit score and financial history. Then, they may approve a credit limit based on these factors. You can withdraw funds as needed, similar to a credit card.
The advantage here is that you will only pay interest on the amount of credit you are actually using. If your business line of credit limit is $20,000, yet you are only using $5,000, that’s the amount you’ll be charged interest on and what you need to pay off. Once it’s paid off, you have access to the full $20,000 in credit again.
You should know about the fine print when it comes to securing a business line of credit. For starters, there is usually an annual fee. The bank’s annual fee will depend on your credit limit and might be waived for higher credit limits.
Interest rates and APRs on business lines of credit are variable. Instead of knowing what your APR is at the outset of the loan, your rate can reset and change based on prevailing interest rates.
In order to qualify for a business line of credit, the bank might want to see that your business is established, profitable and has a consistent history of stable, predictable income. If this doesn’t describe your business situation, then a business credit card might work better for you until your business is more established.
Types of Business Lines of Credit
There are two main types of business lines of credit: secured and unsecured.
Secured Business Line of Credit
A secured business line of credit requires some type of collateral to “secure” the loan. This might include business assets, real estate, inventory or business receipts.
A secured business line of credit might offer lower rates due to reduced lender risk with your secured assets. However, your lender can take your assets if you fail to repay your line of credit.
You’ll want to consider a secured business line of credit if you have a poor credit history or limited business credit. Otherwise, it may not be worth the risk to pledge your assets for access to a business line of credit.
Unsecured Business Line of Credit
An unsecured business line of credit is a revolving credit line that you can qualify for based on your credit history and income — with no collateral required. You can apply by providing your financial information and business details, but you don’t need to pledge any assets to be approved.
Unsecured lines of credit are best for businesses with a strong credit profile and consistent business revenue.
Business Line of Credit vs. Business Loan: Key Differences
Business lines of credit and business loans are similar, but have key differences. You’ll need to know these when choosing one over the other for your business.
In general, business loans are designed for a set amount with fixed monthly payments and a fixed interest rate. Business lines of credit are used more like a credit card with a great interest rate. You can borrow as much or as little as you’d like, and your payment may fluctuate.
| Feature | Business Line of Credit | Business Loan |
|---|---|---|
| Repayment | Revolving credit, reuse funds | Fixed monthly payments |
| Interest | Pay interest only on what’s borrowed | Interest charged on full amount |
| Collateral | Optional (secured or unsecured) | Often required for larger loans |
| Best for | Short-term, flexible funding | Large one-time expenses |
Pros and Cons of a Business Line of Credit
| Pros | Cons |
|---|---|
| Flexible access to funds | Interest rates may be higher than traditional loans |
| Only pay interest on what you use | Requires strong business and personal credit (or collateral) |
| Helps manage cash flow fluctuations | Can lead to debt if mismanaged |
| Can be reused after repayment | Unsecured lines may have lower limits |
How To Qualify for a Business Line of Credit
To qualify for a business line of credit, you’ll need to prove that you have a strong business credit score and steady business revenue. Some lenders will also consider your personal credit score and history when determining whether or not you qualify.
You’ll want to show that your business is profitable and that you have the means to repay the line of credit through your business income. To mitigate any risk, some lenders may require that you pledge collateral to be approved for a business line of credit.
When applying for a business line of credit, you’ll need to provide:
- Personal information (name, Social Security number, address, etc.)
- Business bank statements
- Business tax returns
- Personal income tax returns, if applicable
- Business financial statements
- Documentation of collateral, if required
- Other financial information to help lender determine your eligibility
When Should You Use a Business Line of Credit?
A business line of credit is ideal for entrepreneurs who will have recurring needs for business credit, but don’t necessarily want to take on a term loan. With a term loan, you’d have to make payments, with interest, on debt each month — even if you aren’t actively using it or have an immediate need for it.
This can be expensive for many business owners. A business line of credit can also be a better alternative to business credit cards. The annual percentage rate for business credit cards tends to be high, and the credit limit might be lower than the amount of credit you need access to.
You would use a business line of credit if neither a term loan nor business credit card met your business credit needs. It’s a good solution for seasonal businesses or companies that often have a surge of activity that requires urgent access to short-term loans with flexible terms offered by a line of credit.
- Covering seasonal fluctuations in cash flow.
- Managing inventory purchases or unexpected expenses.
- Bridging short-term gaps while waiting for customer payments.
- Funding marketing campaigns or business expansion without long-term debt.
Where To Get a Business Line of Credit
You can get a business line of credit from several different types of financial institutions. Here’s where you can get a business line of credit and when to choose each:
Traditional Banks
Most local and national banks offer business lines of credit. You can apply in-branch or online. This is best for established businesses with good credit.
Credit Unions
Local credit unions may offer a business line of credit with lower rates for local businesses. This is best for small businesses that want local support.
Online Lenders
If you need money fast, you can apply for a business line of credit online. This is best for businesses that want fast approval and quick access to funds.
Alternative Lenders
Some lenders work with businesses that have poor credit and will approve you for a line of credit with collateral (secured line of credit). But be wary of high fees and interest rates.
Final Thoughts: Is a Business Line of Credit Right for You?
A business line of credit is ideal for flexible, short-term financing needs. It provides on-demand access to capital, but responsible use is key to avoid unnecessary debt. Don’t borrow more than you can pay back, and make sure to keep up on your payments to avoid high interest rates and hurting your business credit score.
When you do decide to apply for a business line of credit, make sure to compare lenders, interest rates, and repayment terms from multiple lenders. This will help you get the best rates and terms for your line of credit.
Business Line of Credit FAQ
Here are answers to some of the most frequently asked questions about business lines of credit.- What is the difference between a business line of credit and a business credit card?
- A business line of credit is a revolving credit line with lower interest rates and potentially higher credit lines. A business credit card offers lower credit lines and charges higher rates -- but may earn rewards or have a low promotional APR.
- Can a startup get a business line of credit?
- Some lenders offer business lines of credit for startups -- but you'll usually need to pledge collateral to be approved. This is known as a secured business line of credit and helps mitigate risks for lenders -- as you haven't yet established profit in your business.
- What credit score is needed for a business line of credit?
- In general, a very good or excellent credit score is usually required to be approved and get the best rates. According to Experian, a very good to excellent credit score ranges from 740 to 850.
- Is a business line of credit better than a loan?
- A business line of credit is better for fast, flexible funding and the ability to control your monthly payments, while a business loan is better for larger fixed expenses. A line of credit can help with things like payroll or variable expenses, but a business loan can help with inventory purchases and other business equipment needs.
- How do I increase my credit limit over time?
- You can increase your business line of credit limit by making on-time payments and increasing your business revenue and profit. You can show your lender updated tax returns with new revenue numbers and request an increased credit line.
Aja McClanahan contributed to the reporting for this article.
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- Experian. 2024. "What Are the Different Credit Score Ranges?"
