Line of Credit Loans: What You Need to Know

When your company needs cash to cover impending expenses, you don’t have time to wade through the business loan application process. Having a line of credit for your business in place provides access to a guaranteed amount of money any time you need it so that you never find yourself in a financial bind.

If you routinely require small amounts of money to keep your business going rather than large lump sums for occasional expensive purchases, a business line of credit could be right for you.

Lines of Credit vs. Business Loans

There are many types of business loans, but a line of credit is somewhat different. The choice between applying for a business loan or a line of credit loan depends on how much cash you need and what you intend to use it for. Business loans typically:

• Provide one-time lump sum payments
• Require repayment at a fixed business loan rate
• Have stable, predictable monthly payments
• Include closing costs or early repayment penalties

Lines of credit, on the other hand, are similar to credit cards in the way the money is accessed. If you qualify for this type of loan, you can expect:

• A set amount of money to borrow against
• Flexibility to borrow as much as you need at any time
• Monthly payments calculated based on how much was borrowed
• Variable interest rates lower than the prime rate
• A draw fee for borrowing against the credit line
• Few or no closing costs

Both loan types require good cash flow, a solid credit score, and a strong financial standing.

When to Use a Line of Credit

Certain businesses, such as retail establishments, benefit more from lines of credit because of the predictable variations in cash flow. Seasonal changes in sales mean earnings fluctuate on a set schedule, and extra money is often needed to continue operations during slow times. When you’re able to anticipate these financial needs, you can rely on a line of credit to provide security.

A line of credit is also useful when:

• You require a short-term boost in working capital
• You’re unable to meet a payroll deadline Inventory needs to be increased or replenished
• You need to cover expenses associated with hiring new employees
• Marketing efforts need to be increased in anticipation of a special event

These types of expenses may not be specific or concrete enough to allow you to qualify for a regular business loan. However, since line of credit loans are given based on financial standing rather than a specific spending plan, you can still get the funds your business requires.

Applying for a Line of Credit: The Basics

Like a business loan, a line of credit may be secured or unsecured. Secured credit lines need collateral to back them up. Unsecured lines are guaranteed by your business and require more trust on the part of the lender. In both cases, you’re at risk of loss should you be unable to make payments. The lender will either take possession of your collateral or have the choice to sue you for what you owe.

To avoid these problems, work to build up a good credit score for your business and yourself. Have a dedicated business bank account, and stay on top of all your payments. Keep detailed records of cash flow, profit and loss, accounts payable and receivable, revenue streams, assets, and income. Most lenders will want to see this information when deciding whether or not to extend a line of credit to your business.

When applying, ask about any fees associated with the credit line. There may be fees for borrowing money or maintaining the account when you haven’t borrowed for a length of time. Make sure you understand the current business line of credit rates and the payment structure so that you can continue to practice good credit management.

Benefits of a Business Line of Credit

You may wonder why it’s worth the effort to go through the application process for a line of credit when a credit card offers similar borrowing options. However, credit cards can hit you with fees and penalties subject to change with little warning. Interest on a line of credit is often lower, and making regular payments also builds up your credit rating.

When compared to some of the best business loan providers, the monthly payments on a credit line tend to be smaller, and you don’t have to worry about the money “running out” when you need it most. Instead, you have a set credit limit to draw from for the duration of the loan term. As long as you’re diligent about paying off what you borrow, you won’t be saddled with the specter of long-term debt.

How to Choose the Right Provider for Your Business Line of Credit

Traditional brick and mortar banks are one source of funding for businesses, however, they may not always be a viable option for every business. Online lenders provide a simplified path to receiving a line of credit and often are willing to give funds to those who may not be approved by banks. In addition, online lenders often provide funds much quicker than traditional banks. When choosing a lender, or lending platform, to provide you with a business line of credit, there are several key factors to consider.

1. Reputation

While traditional banks come with a reputation built in, you may not be as familiar with the leading online lenders. However, this does not mean that such lenders don't have reputations as solid as banks do—you simply have to do some research or check with the experts to make sure they have a track record of providing reliable service. Look for an A+ rating with the Better Business Bureau to ensure that the lender is worthy of your business.

2. Minimum Credit Requirements

Various lenders are willing to take on differing levels of risk. You can save yourself a lot of time if you know ahead of time what a lender's minimum credit requirements are. Online lenders are generally much more forgiving than banks in this regard, and are prepared to look at a number of factors other than credit score to determine your worthiness for a business line of credit. However, lenders will clearly state what their minimum requirements are, so if you don't meet these, you’ll know to look for another provider with more lenient approval standards.

 3. Funding Amount Limits

Those seeking a business line of credit may not have a specific purchase they are funding with a set dollar amount, however they are still likely to have some idea of how much funding they need. Lenders generally have a minimum and maximum line of credit that they will give a business. If you are seeking more than $500,000, then a business line of credit is not the loan option for you. However, the leading online lenders will provide at least $100,000, with some of them extending far beyond this amount.

4. Funding Speed

The speed with which borrowers gain access to their funds is one of the main advantages that online lenders offer over banks. The approval process is often a matter of days and borrowers can start drawing off of their lines of credit in weeks, if not days.

5. APR and Fees

If you are a business owner, a line of credit is a product you purchase to serve your operation. Just as you would seek the product that gives you what you need for your business at the lowest possible price, you will want to choose the line of credit with the lowest APR. The business loan APR, or annual percentage rate, takes into account how much the line of credit will cost you annually, including interest rate and any fees.

Top Business Line of Credit Providers

OnDeck

• Ideal for: Small businesses who need access to cash quickly. 
• Funding Amounts: Up to $100,000 to be used at the borrowers’ discretion. 
• Minimum Requirements: In order to qualify for a loan from OnDeck, you must have been in business for a year, have a credit score of 600+, and have $100,000 in annual revenue. You must be at least 18 years old and a citizen of the US. 
• Repayment Terms and Fees: Repayment terms range from 6-36 months. There is a one-time origination fee as well as prepayment options if you choose to pay back your loan early. 
• Funding Time: Applying to OnDeck is quick and simple. OnDeck is known for its customer service and easy online application. Once approved, you can receive your funding within 24 hours. 
• Bottom Line: OnDeck is a trusted loan provider for small businesses and has an A+ BBB rating. You can apply online in minutes- or pick up the phone and speak with one of the highly-rated loan specialists. 

Read our in-depth review of OnDeck to find out more about this lender. 

Fora Financial

• Ideal for: Newer businesses that require quick funding and have weaker credit scores. 
• Funding Amounts: From $5,000-$500,000 
• Minimum Requirements: To qualify for a loan from Fora Financial, you must have been in business for 2+ years, have no opened bankruptcies in the past year, and monthly revenue of $15K. 
• Repayment Terms and Fees: Short-term loan repayment terms range from 3 to 15 months. Merchant cash advances do not have any set terms. Borrowers are incentivized to repay their loan quickly with early repayment discounts. 
• Funding Time: Applying to Fora Financial is simple and straightforward. It takes minutes to complete the application and you can be approved in under 24 hours. Borrowers receive funds as quickly as 72 hours after approval. 
• Bottom Line: For prospective borrowers seeking swift financing and helpful service, Fora Financial offers a quick application, fast approval, and personalized attention. Prospective borrowers can quickly and easily obtain the short-term business loan or merchant cash advance they need to grow their business. 

Read our in-depth review of Fora Financial to find out more about this lender. 

Mistakes to Avoid With a Line of Credit

While this type of business loan may sound like the perfect fix for just about any cash flow problem, it’s easy to slip into bad habits or make poor judgment calls. To make a business credit line work for you, be careful not to fall victim to these financial mistakes:

• Waiting until the last minute to apply
• Not comparing current business line of credit rates, terms, and qualification requirements between lenders
• Missing out on potential “upgrades” after improving your credit score
• Neglecting to ask if the lender reserves the right to “call” the loan
• Maxing out the credit line

It’s essential to be thorough when looking for a lender and careful when establishing a payment structure so that you don’t wind up in a tenuous financial situation.

With a business line of credit in place, you don’t have to worry about your company going under due to unexpected expenses or a particularly slow season. Be smart about how you use the money available to you, and your company will remain lucrative even during tough times.

Applying for a Business Loan or Line of Credit

If you’re looking to establish a line of credit or you’re wondering how to get a business loan, check out the chart above and take a look at some of the top lenders. Read through our detailed reviews, and make the right choice to ensure your business success.

Disclaimers

American Express® Business Blueprint:

If eligible, you can be approved in minutes for a line of credit from $2,000 to $250,000 when we are able to automatically obtain your business data and verify your bank account. If a manual review is required, it will take longer to provide you with a decision. American Express® Business Line of Credit offers access to a commercial line of credit between $2,000 to $250,000. Each draw on the line of credit will result in a separate installment loan. All loans are subject to credit approval and are secured by business assets. Every loan requires a personal guarantee. Monthly fees range from 3-9% for 6-month loans, 6-18% for 12-month loans, 9-27% for 18-month loans, and are subject to change for future loans drawn under the available line of credit. Not all customers will be eligible for the lowest fee. Not all loan term lengths are available to all customers. Eligibility is based on creditworthiness and other factors. Not all industries are eligible for American Express® Business Line of Credit. Pricing and line of credit decisions are based on the overall financial profile of you and your business, including history with American Express and other financial institutions, credit history, and other factors. Lines of credit are subject to periodic review and may change or be suspended, accompanied with or without an account closure. Late fees and return payment fees may be assessed. Loans are issued by American Express National Bank.

* This offer is provided by American Express® Business Line of Credit (“we”, “us” or “our”). American Express® Business Line of Credit loans are issued by American Express National Bank (AENB). To be eligible to earn the $250 associated with this offer, you must 1) apply and be approved for a line of credit between 6/1/2022 and 8/31/2023 at 11:59pm ET and 2) add and verify your designated business bank account (hereafter defined as “Funding primary account”) on or before 8/31/2023 at 11:59pm ET. AENB will deposit $250 into the Funding primary account you've successfully linked to American Express® Business Line of Credit within 30 calendar days from the date the account is verified. Limit one offer per new American Express® Business Line of Credit account. This offer (i) is not available to existing American Express® Business Line of Credit customers, (ii) is non-transferable, and (iii) cannot be combined with any other offer except as permitted by American Express. We reserve the right to modify or revoke this offer at any time. You may not receive the offer, if we determine in our sole discretion that your account is not in good standing, has a disconnected bank account, and/or you have engaged in abuse, misuse, fraudulent activity, or gaming in connection with the offer in any way or that you intend to do so. We may also cancel your American Express® Business Line of Credit account and other accounts you may have with us. The offer may be taxable income to you and may be reported on IRS Form 1099. You are responsible for any federal or state taxes resulting from the offer. Please consult your tax advisor if you have questions about the tax treatment of the offer. If you have any questions regarding this offer, please call 1 888986 8263 Monday – Friday 8 A.M. to 9 P.M. EST.

¹ All businesses are unique and are subject to approval and review.

The required FICO score may be higher based on your relationship with American Express, credit history, and other factors.

Upstart:

* Small business loan amounts range from $5,000 - $200,000. Your loan amount will be determined based on your credit, income, and certain other information provided in your loan application. Not all applicants will qualify for the full amount. Small business loans not available in NV, NH, MD, WV, IA.

When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information may be reported to the credit bureaus.

Biz2Credit:

* Applies to the Biz2Credit Term Loan. Not reflective of rates for all products. Full Terms & Conditions available at biz2credit.com.