What Is A Business Line Of Credit And How Does It Work?

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Key takeaways

A business line of credit gives companies a reusable form of credit that they can access whenever they need it
Eligibility criteria for lines of credit can be more lenient than other types of business loans, making them an accessible form of funding
You might consider a business line of credit if you expect to need the credit line repeatedly for current and future expenses

Business lines of credit are a popular form of financing for businesses — and for good reason. According to the 2024 Small Business Credit Survey, business lines of credit are the most popular type of funding applied for, with 37 percent of businesses vying for one.

Business lines of credit offer ultimate flexibility, allowing you to use the funds for any business purchases up to the available credit limit. Plus, as you repay the loan, a revolving line of credit will replenish the available credit limit, allowing you to reuse it for funding in the future.

While business lines of credit have a lot going for them, they may come in lower loan amounts and have other drawbacks. Consider how a business line of credit works, its pros and cons and when to consider using one to determine if this funding is the right fit for your business.

A business line of credit is a flexible business loan that works similarly to a business credit card. Borrowers are approved up to a certain amount and can draw on their line of credit as needed, paying interest only on the amount actively borrowed. Funds are typically accessible through a business checking account or mobile app.

Unlike a traditional or term business loan, which disburses funds in a lump sum at one time and is repaid with interest, a business line of credit is renewable. As the borrower makes repayments, the amount of credit available is refreshed, similar to payments toward a credit card limit.

Business lines of credit work by providing funding up to a certain credit limit that the business can tap whenever it needs the money. The funds are typically repaid over a short term, often less than two years.

Business lines of credit have loan amounts that are generally smaller than traditional business loans, though they are often funded more swiftly. Though traditional banks may take days or weeks to fund, many online lenders can provide access to funds as quickly as within a business day.

A business line of credit is either secured or unsecured. A secured line of credit includes collateral, such as cash, investments or real estate to back the loan. The collateral shows the lender that you have assets that you can sell to repay the loan if you suddenly can’t make the regular repayments. The benefit of providing collateral is generally more favorable loan terms and a lower interest rate.

Lines of credit may incur more fees than a business loan, which can add up to a higher borrowing cost. You’ll want to keep this in mind when considering the total cost of a business line of credit. Common fees for business lines of credit include an annual fee, an origination fee when you first apply, a maintenance or monthly fee on the account and draw fees each time you pull from the line of credit.

Bankrate insight

A business credit card has features you won’t find with a business line of credit. That may include cash back or travel rewards, employee cards, discounts on business-related purchases and the chance to avoid paying interest if you pay your balance in full each month. They’re especially useful for building business credit.

When you’re ready to get a small business line of credit, lenders will review your application to determine eligibility. Here’s a look at some of the important factors they will consider.

Credit score. Lenders will consider your personal and business credit score. While it’s possible to get a line of credit with a low credit score, lenders typically prefer fair-to-excellent credit, such as 600 to 670 or higher. The exact credit score requirement will vary from lender to lender.
Annual revenue. Lenders will require that you have a minimum annual revenue. Some lenders are flexible and will consider businesses with an annual revenue of $50,000, but many prefer a revenue of at least $100,000 or higher.
Time in business. Lenders want to see an established, profitable business. A minimum of six months to two years in business is standard.
Collateral. If you can provide an asset to back your line of credit, you may qualify for lower interest rates with a secured line of credit.

Like just about anything else, getting a small business line of credit comes with some pros and cons.

Getting a business line of credit works well when:

You have small to moderately-sized expenses.
You have flexible spending needs.
You think you’ll use the line of credit again in the future.
You have a lower credit score or a lower revenue amount.

While a business line of credit can be helpful for a variety of expenses, it’s not a one-size-fits all solution.

But if you need a business loan for a specific, one-time purchase, getting a business term loan may make more sense. For example, getting an equipment loan would likely make more sense if you’re looking to purchase equipment for your business, since you can snag a lower interest rate with the equipment as collateral.

Bottom line

A small business line of credit can be an excellent and flexible solution for inconsistent cash flow in your small business. But like any form of financing, there are risks to consider. Comparing lenders to find a competitive rate and terms can save money over time.

While credit limits may be lower than what you could get with a small business loan, borrowers can return to the well repeatedly without needing to reapply for funding.

You may need a personal credit score of at least 600 for a business line of credit, usually higher if you’re applying with a bank or credit union. And while it’s possible to find a lender that offers a business line of credit to a business owner with bad credit, most lenders will require you to have at least fair credit.
Business loans are disbursed in one lump sum and repaid by the borrower with interest over time. A business line of credit is approved up to a certain amount, and business owners can repeatedly borrow, using and repaying credit as needed. Business loans may have more favorable interest rates and longer repayment terms compared to a business line of credit.
You can get a business line of credit with bad credit. Some lenders — especially online lenders — will work with business owners with a credit score as low as 500. But choosing bad credit financing means accepting certain drawbacks. Because you’re a risky proposition for the lender, they may offer you less favorable terms, such as lower loan amounts, high interest rates or factor rates or secured lines of credit. You’ll want to compare rates and terms on multiple loan offers to find the best one for your business.
While some lenders may approve you using your Employer Identification Number (EIN) number alone, many will also require your Social Security Number and personal credit report to determine creditworthiness. Many lenders will want a guarantee that you will be personally responsible for any debt you incur in the event your account goes into default.