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Published: Jan 31, 2023 10 min read

Many new businesses don't meet the eligibility criteria set by traditional financial institutions, including minimum time in business, annual revenue and credit score requirements. That makes it more difficult for startups to qualify for lending products like small-business loans.

A business line of credit can be a convenient alternative for small business owners with pressing short-term business needs. They may also be suitable for more established businesses that need fast funding for unexpected opportunities.

This guide covers relevant details about secured and unsecured business lines of credit to help you determine if either of these options is right for you. Read on to find out more.

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What is a business line of credit?

A business line of credit is a small business financing option companies can use to access working capital for business expenses such as inventory, new equipment, payroll costs, etc. These are especially suitable for businesses affected by seasonality or that have fluctuating cash flow needs.

Small businesses or startups often use business lines of credit when they cannot access conventional funding sources. Lines of credit are an alternative to term loans or small business administration (SBA) loans, which may have more stringent qualification requirements.

Like a business credit card, a line of credit gives you access to a predetermined amount of money you can use as needed. You only pay interest on what you borrow, and that credit becomes available again as you make payments. However, business credit cards typically feature higher interest rates than business lines of credit and cannot be used to cover certain expenses, such as lease payments and payroll.

Unlike business credit cards, business lines of credit don't have annual fees, though lenders may charge origination fees, monthly maintenance fees or both. Business credit lines also offer much higher credit limits than business credit cards, especially for new businesses.

Pros and cons of getting a business line of credit

  • Draw funds as needed and pay interest on what you use
  • Bridge gaps between cash flow and expenses, especially during slow periods
  • Fast application processes and funding times
  • Easier to qualify for than traditional lending products
  • Can help build business credit
  • Loyalty to the same lender can get you better terms on future borrowing
  • Often very expensive, with high rates and short repayment terms
  • Credit limits can be low for established businesses
  • May encourage risky spending habits
  • Fees can add up

How do business lines of credit work?

A business line of credit is a form of revolving credit that offers borrowers access to a predetermined amount of money from which they can draw as needed. That differs from other loan products, such as business term loans, which offer a lump sum.

After approval, borrowers can access funds (up to their approved credit limit) through the lender's online portal or mobile app and transfer the amounts they need into their business checking account.

Some lenders set predetermined draw and repayment periods during which borrowers can access their funds and make payments. Once the business has repaid its loan, the lender may renew its line of credit, increasing or decreasing the credit limit based on its creditworthiness.

Types of business lines of credit

Business lines of credit may be secured or unsecured. Unlike secured loans, unsecured business lines of credit don't require borrowers to offer assets, such as real estate or business equipment, as collateral.

Though borrowers don't need collateral to obtain an unsecured line of credit, they must usually provide a personal guarantee. This guarantee makes the business owner responsible for paying back the outstanding loan balance if the business defaults.

Some lenders report business LoC activity to business credit bureaus, but many don't. Using a product from a lender that does report to a business credit bureau allows you to grow your business credit. In either case, poor credit behavior, such as late payments, can affect the business owner's credit.

The lenders mentioned later in this article offer unsecured business lines of credit to startups. However, secured lines of credit and other financial products may be less expensive, depending on your eligibility.

What is the average interest rate on a business line of credit?

The costs associated with a business line of credit include interest and other loan fees. According to American Express, APRs on business lines of credit can range from 8% to 80% or more. Of course, rates will vary by lender, loan amount and the borrower's eligibility.

Besides interest, lenders may also charge origination fees, draw fees, maintenance fees and closing costs.

Generally, online lenders offering unsecured business lines of credit reward repeat borrowers with lower interest rates on subsequent loans. However, their fee structures can be confusing, so make sure you understand how your rate may change over the term of your loan before applying.

How to get a startup business line of credit

Eligibility requirements vary by lender. Generally, businesses need the following to be considered for a business line of credit:

  • A credit score of 600 or higher
  • To have operated for at least six months
  • A business checking account
  • Monthly or annual revenue requirements (a minimum annual revenue of $100,000 is common)

To get a startup business line of credit, you'll also need to provide the following documentation:

  • A business checking account in good standing
  • Any applicable business licenses or permits
  • A business plan
  • An Employer Identification Number (EIN)
  • Personal information and identification for all business owners
  • Personal and business tax returns and financial statements
  • Collateral (if its a secured line of credit)
  • A personal guarantee (if its an unsecured line of credit)

Once you have all the necessary paperwork, applying for a business line of credit from an online lender is relatively simple and fast. Many companies offer same-day approval, some within minutes, with funding available as soon as the next business day.

Some online lenders require little paperwork and instead connect to your business accounts to determine your eligibility and rates based on your business's financial statements.

As with any type of financing, a steady income stream and a high credit score will improve your odds of approval and get you a better interest rate.

Best options for startup business lines of credit

Bluevine 625 $5,000 - $250,000 6 months No monthly maintenance fees, $15 wire transfer fee 6 or 12 months
Fundbox 600 $1,000 - $150,000 6 months No fees 3 or 6 months
Kabbage Funding 640 $2,000 to $250,000 12 months No fees 6, 12 or 18 months
OnDeck 625 $6,000 to $100,000 12 months 0.00% to 4.00% one-time loan origination fee, $20 monthly maintenance fee 12 months

For more options, read our guide to the best unsecured business loans.

How to choose the right option for a small business line of credit

When opening a business line of credit, look for options for which you may be eligible, given your credit score, revenue and time in business. Then, shop around and compare options from different lenders.

Some lenders are more transparent than others regarding fees and rates. Make sure to read the fine print and understand the terms of the credit line before you apply for one, especially before you start to use it.

If your business has been operating for longer than a year, particularly two or more years, you may be able to access funding at better rates. An unsecured business line of credit may not be the best choice for an established business with good credit or one that can offer collateral. In such cases, traditional loan options may be best.

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Startup business lines of credit FAQs

How can I improve my credit score for a line of credit?

Improving your credit score takes time; there are no quick fixes. Experts recommend paying your bills on time, keeping your credit utilization ratio below 30% and keeping old credit accounts open, even after you've paid them off.

Since multiple credit inquiries over an extended period can negatively impact your credit score, you should limit new credit applications as much as possible. Nevertheless, opening another credit card, particularly a secured credit card, could help lower your credit utilization ratio on existing cards. Use your best judgment and make timely payments to build good credit.

Other steps to improve your credit score include disputing errors on your credit report and seeking credit counseling if you need help with debt management. Non-profit organizations like the National Foundation for Credit Counseling (NFCC) can provide credit counseling for free or at a low cost.

Can I get a line of credit for my startup business earlier?

Though business lines of credit are often available to new startups, most lenders require borrowers to have at least six months in business and meet minimum monthly or annual revenue thresholds. Companies looking for quick funding may consider alternatives like opening a business credit card.

Are there alternatives to lines of credit for startup businesses?

Alternatives to opening a line of credit for startup businesses include business credit cards, personal loans, crowdfunding, angel investors or leaning on friends and family for funding.

Other options for new companies that lack good credit history or substantial yearly income are personal loans or business credit cards, which typically don't require a minimum time in business or a high minimum annual revenue. You may get better rates on either of these products than a business line of credit, but they are not without risks. When in doubt, consult a financial advisor.

Should I start a credit line for a startup business?

Business lines of credit can be an excellent product for startups who need access to funding quickly. However, they often come with high costs and fast, demanding repayment terms.

Business lines of credit are best for businesses that need quick access to cash for an expansion opportunity, to cover revenue gaps, etc. They are also an option for those that can repay their credit line quickly.

Otherwise, traditional loans are a better route, offering lower rates and longer repayment terms if businesses can qualify for them.

Summary of our guide to best startup business lines of credit

Business lines of credit offer startups a way to access funding quickly and have less stringent eligibility requirements than traditional loan products. A business line of credit may also be an attractive option for established businesses that want to seize new opportunities or fill unexpected cash flow gaps.

With a business line of credit, borrowers have access to a predetermined credit limit they can draw from repeatedly as they repay, and they only pay for what they use. To be eligible for a line of credit, small business owners typically need to have operated their business for over six months and have a credit score of 600 or higher.

The rates and repayment terms for a business line of credit vary widely by lender and are based on the borrower's eligibility. To get the best deal on a line of credit for your business, make sure you only borrow what you need and shop around to compare rates and repayment terms from different lenders.