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If you’re a small business owner, chances are there’s one headache that haunts you often—the cash flow headache.

“It costs money to make money” isn’t just a term used to get a few laughs at the round table—it’s just a fact. Even the largest companies in the world access outside transactional funding to help support their business needs.

But what happens when a company reaches a point where its business checking account begins to sink as its growth-oriented business expenses mount? Many look to small business loans and banking products known as lines of credit. You may have even received a line of credit offer from your current bank.

Read on to learn more about business credit lines, when they come in handy, how to access them, and alternatives to consider.

What is a business line of credit?

A business line of credit is a flexible funding option that allows you to borrow funds up to a certain limit, repay it, and then access those funds again as needed. It functions somewhat like a credit card but typically offers higher limits with better interest rates.

How does a business line of credit work?

These revolving lines of credit work much like business credit cards. As you use it, the balance you owe to your lender grows. As you make your monthly payments, that balance shrinks. Moreover, there’s typically no prepayment penalty, making it possible to access working capital and pay it off completely as your company’s finances allow. All business lines of credit fall into one of two categories:

  • Secured line of credit: A secured line of credit is attached to a form of security. This security may be real estate, equipment, or other assets that offset the risk for the lender should the company fail to meet its repayment obligations.
  • Unsecured line of credit: An unsecured line of credit is one that’s only secured by the borrower’s promise to pay the money back. The lender has no right to property should the borrower fail to meet their repayment obligations.

Term loan vs. credit line

Business loans and lines of credit may seem similar, but there are significant differences between the two. The most important differences to consider include:

  • Repayment terms: You’ll repay term loans over a predetermined amount of time, typically between 36 and 72 months. At that point, the loan will be closed and marked as paid off. Even when you pay off a credit line, the line stays open and you continue to have access to capital.
  • Flexibility: Term loans are given in one lump sum, typically to pay for a specific item. You can access the available credit in a revolving credit line any time you need to.
  • Cost: Term loans are typically less expensive than credit lines.

Pros and cons of taking out a business line of credit

At first glance, a business line of credit may seem like the perfect option for your business. However, it’s important to consider the pros and cons before you make any financial decisions.

Pros

  • Repayment: You’re able to pay your credit line off over time with manageable monthly payments.
  • Options: Between traditional lenders and countless online lenders, you have a multitude of options to choose from if your business qualifies for a line of credit.
  • Capital: Lines of credit give you access to capital when you need it. As long as you don’t go over your credit limit, you can access any amount of money you need at any given time.

Cons

  • The cost: Business credit lines can be expensive. They typically come with higher interest rates than term loans alongside annual fees, origination fees, maintenance fees, draw fees, and other additional fees. Be sure to read fee disclosures carefully and seek options with lower interest rates and fees.
  • Credit approval: Your business will need a good credit score to meet eligibility requirements. If not, you may have to make a personal guarantee using your personal credit score.
  • Not designed for lump sum purchases: If you need to make a large one-time purchase, a term loan is typically a better fit.
  • Collateral: You may be required to offer real estate or other assets as collateral to access the funding you need.

Business lines of credit for small businesses and startups

New businesses often need access to capital and may choose a credit line over a startup business loan. If that’s your situation, consider the following.

When a line of credit makes sense

The purpose of a business line of credit is to provide access to short-term working capital. This is a fitting choice for certain scenarios, including:

  • Funding short-term projects that require an upfront investment.
  • Restocking inventory in anticipation of a busy season.
  • Bridging the gap between when expenses need to be paid and when receivables are expected.
  • An emergency fund for unexpected expenses.

When a line of credit doesn't make sense

Although a business line of credit may seem like the perfect option if you need funding, it can impede the development of your business if used improperly. In some cases, business lines of credit just don’t make sense. Some examples include:

  • If you’re making a large, one-time purchase, you’ll likely be better served with a term loan that offers lower interest rates and fees as well as fixed monthly payments for a predetermined period of time.
  • If you don’t have great credit and can’t access a line of credit with reasonable rates and fees, it’s best to exhaust all other options before choosing to open a LOC.
  • If you simply don’t qualify for a business line of credit, there’s no reason to stress yourself out over trying to get one. There are other options to choose from.

Where to start

If you’ve decided that a credit line is right for you, you’ll want to get prepared before you start the application process. Get the following in order before you apply:

  • Tax returns: The lender may want to look at your business and personal tax returns for the past three years as part of the qualifying process.
  • Bank statements: Your lender will likely want to take a look at your business bank account to ensure you can afford the loan.
  • Articles of incorporation: The lender will use your articles of incorporation to verify the age and legitimacy of your business.
  • Collateral documents: You may need to provide documents related to real estate or other collateral you plan to use. Be sure to have these handy.

What credit score do I need for a business line of credit?

You'll typically need a personal credit score of 670 or higher to qualify for a business line of credit. Additionally, lenders will want to see that you have no defaults on your credit history, that you've been in business for at least one year, and that you have a reliable source of annual revenue.

Here’s a closer look at each of these factors:

  • Credit requirements: A credit score of 670 or higher is typically required to access a line of credit. If you have no business credit score or bad credit, it may be wise to work on your creditworthiness before accessing a business line of credit. Also, consider getting a prepaid credit card for business to work on your business credit score in the process.
  • Time in business: Most lenders will want to see that you’ve been in business for at least one year, but some may accept you if your business is newer. Just note that interest rates for a less established business may be higher.
  • Monthly or annual revenue: Monthly or annual revenue requirements vary by lender, but traditional banks will typically require your business to be making $100,000 annually. Online lenders often have more lenient requirements.

If you don’t think your business meets all of these requirements, remember that you still have other options. If you don’t have the best credit or any collateral to offer, consider working with Ramp and taking advantage of our sales-based underwriting.

TIP
How much of a line of credit can I get for my business?
As a small business, you can expect to qualify for lines of credit between $5,000 and $500,000. Your length of time in business, annual revenue, and creditworthiness will all factor into which loans you’re approved for, as well as your interest rate.

Current business line of credit rates

Here are the current business line of credit rates from some of the top providers:

Provider Interest Rate(s)
OnDeck 29.9% to 99.9% APR (average around 49%)
BlueVine 6.2% to 86% APR
Bank of America As low as 9.50% APR
PNC Bank Variable, based on the Prime Rate
Wells Fargo Prime + 0.50% to Prime + 4.50%
Lendio 8.00% to 60.00% APR
Backd 18.00% to 24.00% (simple interest)
Funding Circle Starting at 10.99% APR
Kabbage 2% monthly fee
Fundbox As low as 4.66% APR (weekly fee rate)

Best business lines of credit

If you’re looking for financing options for your small business and believe a line of credit is the way to go, consider one of the providers below.

OnDeck

OnDeck is a popular online lender that’s known for reasonable repayment terms and reliable access to funding. Their line of credit products come with interest rates starting at 29.9% and are typically available to borrowers with a 625 or higher credit score.

With OnDeck, you’ll be able to borrow between $6,000 and $100,000. Every time you access money, you’ll have 12 months to pay the funding off, and the 12-month clock restarts if you tap into the line of credit as you’re paying off a balance.

BlueVine

Finally, BlueVine is an impressive offering, largely because of the low interest rates the company offers. Rates start at just 6.2% for the most qualified borrowers. However, you don’t have to have perfect credit to qualify either. The minimum FICO score to qualify is just 625.

However, if you’re just getting started, you’ll have a hard time getting approved. In fact, you’ll have to be in business for at least 24 months to qualify.

Credit lines for larger enterprise companies

If you’re leading a larger enterprise, your needs will differ from those of small business owners. However, a business line of credit may still fit the bill. Read on to find out if a LOC is for you and how to get your hands on one if it is.

When a credit line makes sense

As an enterprise company, you likely serve large clients. But, that comes with challenges. There are significant costs associated with providing products and services to large clients, and in many cases, those products and services are provided on trade credit lines. That means it may be months or even years before your company receives compensation.

This is when credit lines come in handy. Moreover, you may use a credit line to access base materials at low, bulk prices, reducing your costs of goods and increasing your margins. However, before taking advantage of this opportunity, be sure to consider the cost of interest and the fees associated with the credit line to ensure that cost savings truly exist.

When a credit line doesn't make sense

As is the case for small businesses, there are plenty of situations in which a line of credit simply doesn’t make sense for enterprise-level companies. Some of those instances include:

  • If your company can cover costs without detriment to operations, avoid high-cost credit lines to keep more of your profits in-house.
  • Regardless of the size of your company, business credit lines aren’t designed for large, one-off purchases. So, avoid using these as financing options for expensive machinery, real estate, or other high-cost business assets. There are plenty of lower-cost ways to access the funding you need for these assets.

Where to start

As an enterprise-level company, chances are you’ve got the business credit score needed to qualify for a line of credit, but it’s always a good idea to make sure. So, start by checking your company’s credit to see where you stand.

Next, start getting all of your documents in order. You’ll likely need:

  • Articles of incorporation
  • Profit and loss statements for up to the past three years
  • Tax returns
  • Bank statements

Once you have these in hand, it’s time to move forward with your application.

How to get approved

As is the case for startups and small businesses, there are a few things enterprise-level companies can do to improve their chances of getting approved for a business line of credit. Some of the most effective opportunities include:

  • Pay down other debts. Lenders often look at your credit utilization and debt as a percentage of revenue. When you pay down outstanding debts, you have a better chance of getting approved for new credit.
  • Be prepared to offer collateral. After all, if you’re willing to take some risk off the lender’s shoulders, they’re more likely to loan you money.

Top providers

If you’re considering a business line of credit for your enterprise-level business, one of the following options may be a good fit for you.

Bank of America

Bank of America offers a wide range of business lending products, including secured and unsecured business lines of credit. This is a compelling choice for enterprise-level companies because the company lets you borrow up to $2 million while many other options cap credit lines at just $100,000.

You’ll have to be in business for at least two years to qualify, which is fine for enterprise-level companies but may be an impossible requirement to meet for startups.

PNC Bank

PNC Bank is another compelling option with a bank that’s well-respected across the United States. Moreover, the bank offers credit limits as high as $3 million, which is a decent loan amount even for an enterprise-level company.

There is a catch to such a high credit limit though. All PNC Bank lines of credit must be secured by some form of collateral. So, if you’re not willing to put your valuable assets on the line to access the funding you need, you’ll likely need to look to another provider.

Wells Fargo Prime Line of Credit

Finally, the Wells Fargo Prime Line of Credit is only available to companies with a minimum of $2 million in annual revenue. This is an attractive option because rates start at just prime plus 0.5% with a 5% floor. Moreover, you’ll have access to rewards and a credit card that lets you make purchases directly from your LOC’s available credit.

Ramp’s alternative solution to credit lines

Although a line of credit may be appealing, take a look at Ramp before you apply. Ramp is an innovative financing option that gives you access to the spending power you need with a charge card instead of a credit card, alongside a wide range of other features.

It’s perfect for small and enterprise businesses that need a way to empower their employees to spend on their company’s behalf while automatically tracking purchases and enacting spend controls.

The best part is, there are no monthly fees. You won’t pay interest, origination fees, monthly maintenance fees, or any other fee. Moreover, if you need access to loans that can carry over month-to-month, Ramp can team you up with our vetted lending partners to help you secure business and SBA loans.

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Finance Writer, Ramp
Richard Moy has written extensively about procurement and vendor management topics for companies like BetterCloud, Stack Overflow, and Ramp. His writing has also appeared in The Muse, Business Insider, Fast Company, Mashable, Lifehacker, and more.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

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