Adding new, in-demand items to your shelves. Purchasing updated machinery to expand your operations. Buying office gear for your new hires. Making these investments isn’t always possible for small businesses, especially when you’re on a limited budget.
Taking out a one-time business loan and going into long-term debt is one option — but it isn’t the only one. As an alternative, you might consider opening a business line of credit that allows you to access funding whenever you need it.
That convenience and flexibility is likely a top reason 76% of businesses sought this form of financing over credit cards, invoice factoring, and other methods.
But what’s the best business line of credit to pursue for your business?
What is a business line of credit?
A business line of credit is a financial tool that offers businesses access to cash in an open-ended manner, without needing to take out a loan.
A business line of credit works like this:
- First, you’re approved for a line of credit (LOC), up to a certain amount (depending on a number of factors, such as your business’s credit profile).
- You’re then allowed to draw from this line of credit as needed, much like you would with a credit card.
- If you carry a balance, you will be charged interest on that balance (as set in the terms provided by your lender).
- As you make payments (typically weekly or monthly) and pay down your balance, you will free up more “credit” that you can use in a revolving manner.
How long you have to repay your LOC will depend on the terms you agree to. Some lenders require repayment in as little as three months, while others may extend repayment for years. Likewise, some lines of credit must be repaid annually.
Unsecured business lines of credit vs. secured business lines of credit
Business lines of credit come in two options: unsecured and secured.
An unsecured line of credit isn’t backed by collateral (e.g., business assets the lender can take if you default on payments). These are typically more difficult to qualify for, and often carry a higher interest rate compared to a secured line of credit. It’s a great option if you don’t have any collateral to offer or don’t want to risk losing an asset if you can’t repay the loan.
Unsecured lines of credit tend to have higher interest rates, since they involve more risk for lenders. However, if you’ve been in business a long time and have an excellent credit score, your interest rates will likely be lower than a business that’s been around for less time or that has a worse credit score.
A secured line of credit is backed by collateral — usually property or equipment — that the lender is entitled to take possession of if you’re unable to repay your loan. This translates into less risk for lenders, and therefore lower interest rates compared to an unsecured line of credit. However, if you can’t repay the loan, you could lose the asset used as collateral.
Business lines of credit requirements
Applying for a business line of credit has a similar process to other financing options. The requirements differ depending on the lender, but many require:
- A good credit score: Most lenders will require you to have a good business credit score to qualify for a business line of credit. This typically translates into a score of 670 or higher, depending on the credit scoring model used. Some lenders are willing to work with businesses with fair credit or no credit history.
- Financial statements: You’ll need to provide your financial statements, such as income statements, balance sheets, and tax returns, to prove the revenue your business generates. This is to ensure that your business can repay the amount you charge on your LOC.
- Business operating time: Lenders may ask for proof of your business’s history, such as the date you first opened and your business license. Some may also require you to be in business for a minimum of one to two years.
- Collateral/guarantor: Depending on the type of line of credit you’re applying for, you may need to provide collateral (e.g., equipment, real estate, vehicles) or a guarantor (someone or an entity that agrees to repay the loan if you default).
Now that you know what lenders look for when approving a company for a business line of credit, it’s time to review your options.
Best business lines of credit for small businesses
Business lines of credit are available through many different lenders, including large national banks, regional banks, credit unions, and even online lenders.
Here’s a list of the top lenders for business lines of credit.
Fundbox is one of the best options for businesses seeking an unsecured line of credit. It offers smaller lines of credit ranging from $1k to $100k, with interest rates starting at 4.66%.
To qualify, a business must be at least six months old and have a business checking account, which you’ll connect with your Fundbox account to verify your income and speed up the process of determining whether you meet revenue requirements.
Fundbox has an automated underwriting process to qualify you for a loan, which means faster approvals (sometimes within hours).
- Requires low minimum personal credit score of 600
- Fast decision
- Next-day funding
- Short-term repayment terms
- Must generate at least $100k in annual revenue
OnDeck Capital offers unsecured lines of credit ranging from $6k to $100k, with APRs starting at 29.9%. To qualify for an OnDeck line of credit, businesses need a personal credit score of 625 or higher, be at least one year old, and have an annual revenue of $100k or more.
OnDeck’s short-term and revolving lines of credit make it an appealing option for businesses seeking quick financing options.
- Credit lines up to $100k
- Receive funds the same day (even on nights and weekends)
- Requires a low minimum credit score of 625
- 12-month repayment term that resets after each withdrawal
- Minimum annual revenue requirement of $100k
- Only for established businesses with at least one year of operation
- Not available to companies in North Dakota, South Dakota, or Nevada
3. American Express Business Blueprint
American Express Business Blueprint recently launched the American Express Business Line of Credit, previously known as Kabbage from American Express and Kabbage Funding. This line of credit is available to small-business owners who can apply for a credit line ranging from $2k to $250k, with repayment terms of six, 12, or 18 months.
Note that there’s a loan fee for every month you have an outstanding balance. The total monthly fees charged for the entire loan term range from:
- 2% to 9% for six-month loans
- 7.5% to 18% for 12-month loans
- 15.75% to 27% for 18-month loans
American Express Business Blueprint offers other useful tools for small-business owners, such as its mobile app that provides comprehensive cash flow insights.
- Backed by American Express
- No prepayment penalty
- Business tools for small-business owners
- Requires a low minimum personal credit score of 640
- Only need $3k/mo. in revenue
- Requires personal guarantee
4. Wells Fargo
Wells Fargo is a well-known bank that offers secured and unsecured business lines of credit ranging from $5k to $1m.
There are two options for unsecured business lines of credit — one for those in business for at least two years, and another for businesses under two years old.
Here’s the difference:
- 2+-year-old business: Offers funding between $10k and $150k with rates starting at 1.75%
- Under 2-year-old business: Offers funding between $5k and $50k with rates starting at 4.5% (no annual fee ever)
- Offers large credit limits up to $1m
- Low interest rates compared to other lenders
- Provides a variety of other business banking services
- No annual fee forever (if you’re a newer business)
- Automatic enrollment in free rewards program
- Requires collateral, which can be a risk for the borrower
- Doesn’t disclose the credit score you need, so it’s a hit or miss when you apply
5. U.S. Bank
U.S. Bank is another well-known bank that offers secured business lines of credit with limits up to $1m. It offers four types of business line of credit programs:
- Cash flow manager line of credit: Offers secured credit limits up to $250k with competitive interest rates starting at 1.99% (can choose to lock in a fixed rate on your existing balances). Unsecured credit lines up to $100k are also available, with higher interest rates. Best for businesses that are at least two years old. There’s no annual fee if your line of credit is over $50k.
- Business line of credit to purchase materials, equipment, or inventory: Offers credit limits up to $1m with competitive interest rates (doesn’t say what they are). Plus, there’s an interest-only payment option where you only make payments on the interest, not the full balance.
- Business equity line of credit: Allows you to use real estate as equity to borrow up to $500k with revolving terms of up to five years. Interest-only monthly payments are also available.
- Business reserve line: Protects you from overdraft charges and allows you to borrow up to $5k. There are no annual fees, and you can link it to your U.S. Bank business checking account.
- Offers credit limits up to $1m
- Low interest rates compared to some other lenders
- Offers several business line of credit programs to match your unique needs
- Has annual fees for certain programs
- Doesn’t mention credit score minimum
BlueVine is a fintech company that provides financing solutions to small businesses across the United States. One of its key offerings is a business line of credit, ranging from $6k to $250k.
There are two payment structures available for the business line of credit: Flex 6 and Flex 12.
- Flex 6 involves weekly payments over 26 weeks
- Flex 12 requires monthly payments over 12 months
Customers who make timely payments may be eligible for a credit line increase after 45 days on Flex 6 or 90 days on Flex 12.
However, BlueVine charges weekly or monthly fees for its line of credit, with standard pricing at 1.7% per week or 7% per month for line of credit draws. It’s important to note that BlueVine requires businesses to generate $40k/mo. or $480k/yr., and you must be a corporation or LLC. If you filed for bankruptcy within the last three years, you won’t qualify.
- For loans under $25k, collateral is not required
- Lines of credit up to $250k
- Funding within 24 hours
- Low credit score requirement of 625
- Decisions within five minutes
- No mobile app for its line of credit
- Requires collateral for larger loans
- Large monthly revenue requirement
- Not available to business in North and South Dakota, Puerto Rico, and other US territories
Choosing the best business line of credit
When choosing the best business line of credit for your business, there are several factors to consider:
- Interest rate: Look for a line of credit with the lowest possible interest rate. Compare various options to find the best rate for your needs.
- Loan terms: Make sure you understand the loan’s repayment terms and conditions. Are there any prepayment penalties? Do you have to pay off a minimum amount each month?
- Credit limit: Determine how much money you need now and in the future, then look for a line of credit that offers a high enough limit to cover those needs.
- Repayment flexibility: Choose a line of credit with flexible repayment options that fit your budget.
The best business line of credit for you depends on your individual needs and goals. Be sure to compare various lenders and take the time to understand their terms and conditions before deciding.