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Business line of credit: what they are & where to get one

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Business line of credit: what they are & where to get one

Updated: December 3rd, 2020

Business line of credit: what they are & where to get one

If you’re looking for flexible short-term funding for your business, a business line of credit could be exactly what you need, as it gives you access to a specific amount of money that you can dip into on an ongoing basis.

As a business owner, there’s no shortage of the unpredictable scenarios that may come your way: a new pizza oven suddenly malfunctioning, a (way) overdue accounts receivable that’s squeezing your cash flow, or your seasonal business failing to meet revenue expectations due to the previous summer’s less-than-stellar weather.

A business line of credit can take the pressure off any cash flow issues that come your way and keep your operations running smoothly. In this guide, we’ll dig into the following:

  • What is a business line of credit?
  • How does a business line of credit work?
  • Pros and cons of a small business line of credit
  • What’s the best business line of credit for my small business?
  • Business line of credit requirements
  • How to get a business line of credit
  • Business line of credit vs. credit card
  • Business line of credit loan vs. term loan

What is a business line of credit?

A business line of credit allows you to access capital, ranging from $5,000 to $500,000 or more, if and when you need it. With a business line of credit, you don’t make payments or rack up interest until you actually use your funds.

Credit lines work best for short-term financial needs. This includes ongoing operating costs, smaller purchases, or any situation that might result in a temporary shortage in cash flow.  

How does a business line of credit work?

A line of credit gives you increased financial flexibility and is best used as a tool to help fill gaps in working capital.

So, how does it work in practice?

Let’s say you’re approved for a $50,000 business line of credit with a 14% interest rate. You decide to draw $10,000 to invest in top-notch inventory management software that’ll help maximize sales for the upcoming holiday season.

With a repayment term of 12 monthly payments, you would have to pay back $11,400 ($10,000 plus $1,400 in interest) in total.

You would still have access to the remaining $40,000, and once you paid back the $10,000 you used (plus interest), your credit limit would return to the original $50,000 you were approved for.

This is why most lines of credit are classified, similar to credit cards, as “revolving.” You can usually tap into these funds again and again—assuming you’ve paid back what you borrowed.

However, it’s important to keep in mind that terms vary across lenders. For example, in some cases, you may need to reapply for financing each time you draw from your line of credit.

how does a business line of credit work

Pros and cons of a small business line of credit

Like any other business financing option, there are several pros and cons to lines of credit.


  • Only pay interest on the cash that you borrow. Unsure of how much money you need? If you get approved for a line of credit for $50,000, but only use $30,000, you’d only pay interest on the $30,000.   
  • Accessible with poor credit. While getting approved for a traditional loan with a shaky credit report can be difficult, lines of credit — particularly those offered by online lenders — tend to have more lenient minimum requirements. To put this into perspective, while SBA loans and many traditional bank loans require a minimum personal credit score of 640, you can find line of credit minimums as low as 550, and some line of credit lenders do not even list or require a minimum personal credit score.
  • Fast access to funds. If you don’t have time to wait, a business line of credit could be the answer. Once you qualify, you could have the funds in your pockets within the same day, and in some cases instantaneously.
  • Able to use for a variety of purposes. You can use a line of credit for pretty much any and all products and services. It’s meant to help fill the gap in your working capital, whether that’s payroll, purchasing inventory, or fulfilling a large customer order.  


  • More expensive. With a line of credit, your interest rate may be variable, which could result in skyhigh rates. Plus, if you miss a payment or go over your spending limit, you could be hit with costs that put you in the red.
  • Fees. It’s common to see a number of fees with a business line of credit including: 
    • Monthly maintenance fee: $20 monthly maintenance fee to cover the cost of servicing and processing your line of credit account.
    • Draw fee: 1.6% to 2.5% draw fee when you tap into your credit line.
    • Late payment fee: You may be charged a fee, such as 5% of the past-due amount, if you miss a payment after taking a draw.

While at first glance $50 or even $100 bucks may not seem too bad, these numbers can add up quickly. That’s why—as with any other form of business financing—it’s so important to have a plan and use your business line of credit strategically.

What’s the best business line of credit for my small business?

When choosing the right line of credit for your business, there are some important differentiations you should understand.

Revolving vs. non-revolving: While most lines of credit are revolving it’s important to understand there is a non-revolving line of credit. What does that mean? Let’s use the example from earlier where you were approved for $50,000. This time around, after you used the $10,000, you’ve decided to use the additional $40,000 to keep things afloat during the off-season. With a non-revolving line of credit, once you paid back the $10,000 and $40,000 in full (plus interest), rather than having access to the full $50,000 again, your account would be closed.

Secured vs. unsecured lines of credit: With secured lines of credit, you’re required to put up some type of collateral or guarantee, which the lender can seize if you default on your payments. Collateral can include (but is not limited to) real estate, equipment, or inventory. On the other hand, unsecured business lines don’t require the borrower to put up any type of collateral. However, because the lender is accepting more risk, you can likely count on higher interest rates.  

Business line of credit requirements

While lenders typically have varying eligibility requirements, to qualify for a business line of credit, you will likely need:

  • At least six months in business
  • At least $25,000 – $50,000 in annual revenue

How to get a business line of credit

Not all lenders ask for the same information. Online lenders may ask you to fill out a short questionnaire and link your business bank account so they can quickly assess the financial status of your operation, or they may request a variety of documents to evaluate your application. The benefit of using a service like Funding Circle is that it allows you to compare your options from a variety of lenders in one place.  

While different lenders may require different documents, you can never be over-prepared when applying for a business line of credit. Use this as an opportunity to get your paperwork in order. Some of the most common items requested include:

  • Most recent bank statements
  • Business Tax ID / Employee Identification Number (EIN)
  • Social Security number
  • Driver’s license
  • Tax returns
  • Financial documents (like a P&L statement or cash flow statement)
  • Business license

Business line of credit vs. credit card

A credit card is technically a line of credit, so these two forms of financing can be confusing. They’re both tools that can finance aspects of your business while helping you to build your business and personal credit, which can result in more favorable terms for future loan products.

So, what’s the difference between a credit card and a business line of credit?

business line of credit vs business credit card

Access to cash. With a credit card, you purchase products and services with credit, and then pay your bill later — ideally, in full by the due date listed in your billing statement. With a line of credit, you have access to cash that is deposited into your checking account (once you draw from your credit line).

While credit cards are convenient and made for retail purchases that require a quick swipe, there are a multitude of other scenarios where you may need to write a check or access a large amount of cash in a short period. Some credit cards allow cash advances, but it will cost you significantly more than a line of credit, and you’ll like only be able to borrow a fraction of your credit limit.

Rewards: Unlike lines of credit, business credit cards tend to offer cash back or travel rewards. Plus, some business credit cards come with an introductory 0% APR period.

Credit limits: Lines of credit typically have higher borrowing limits than credit cards.

Note: A line of credit is structured so you pay back what you borrow (plus interest) over the course of six to 12 months. This can help when it comes to budgeting payments over time. On the other hand, if you don’t pay off your business credit card in full each month, you may find yourself racking up debt due to overwhelmingly high APRs.

Business line of credit loan vs. term loan

There are several key differences between a line of credit and term loan.

business line of credit vs term loan

Repayment: You don’t make payments or accrue interest until you actually draw from your business line of credit. So if you borrow $50,000, but only use $20,000, you would only pay interest on the $20,000. With a term loan, on the other hand, you’re given the lump sum of $50,000 upfront which you start paying right away — even if you realize you only need $20,000 to get the job done. 

Loan terms: Lines of credit are generally capped at 12 months. With a term loan, typical repayment periods range from 6 months to 5 years.

Use case: A line of credit offers flexibility and is ideal for keeping your cash flow in a good place. If you own a seasonal business, a business line of credit could help you cover payroll during the slow season or purchase inventory to gear up for the busy season. However, depending on a line of credit to cover specific long term business investments just isn’t sustainable. A good rule of thumb is to use a term loan for bigger and more specific needs.

Business credit from Funding Circle

Funding Circle and our network of partner lenders are here to help you find the financing that’s right for you. Business lines of credit are incredibly flexible as you can draw out funds when you need to, and only pay interest for the money you borrow. As you repay what you have drawn, your line of credit will replenish and can be tapped again.

  • Best-in-class service with a dedicated account manager
  • A decision in as little as 24 hours after document submission
  • Fixed monthly payments
  • Fair, transparent rates and a simple, one-time origination fee
  • Credit lines from $6K to $250K
  • Pay interest only on drawn funds
  • Rates as low as 4.8%
  • Decision as fast as 24 hours and funds in as few as 3 days

If you need business capital, consider taking a few minutes to apply for a business line of credit with Funding Circle today.


What kind of businesses are best suited for lines of credit?

Any business may be able to benefit from a line of credit if it has regular, short-term financing needs or is making ongoing payments for a large project. Companies that regularly face cash-flow crunches, such as manufacturing, wholesale, construction and medical businesses could use a line of credit to smooth their cash flow.

Is there an application fee?

Funding Circle’s partners don’t charge an application or account opening fee, but some lenders do have application or account opening fees for new business lines of credit. Prepayment fees aren’t common on business lines of credit. However, lenders may charge monthly or annual maintenance fees, and origination or draw fees when you tap your line of credit.

How does repayment work?

A business line of credit gives you the option, but not the requirement, to borrow money as you need it. Having an open business line of credit can be helpful whether you experience a setback or want to take advantage of a new opportunity, but don’t want to worry about applying for and getting a new loan. A line of credit can also be less expensive than a term loan when you need to make recurring payments, as you’ll only pay interest on the money you borrow.

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