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What is a business line of credit and how does it work?

A business line of credit can ease cash flow issues, since the funds are there when you need them.
Written by Cynthia Bowman, Contributor

Cash flow is the lifeline of a business -- and the biggest pressure point. A recent QuickBooks survey of 3,500 small business owners found that 60% said cash flow was a problem for their business. Part of the reason that cash flow is such a challenge is that newer businesses don't have business credit, making it difficult to qualify for funding. And even if a business loan is possible, the process is slow, causing delays in getting vendors, employees and suppliers paid.

A business line of credit is a good alternative to a traditional loan, especially when unexpected expenses pop up. It's a hybrid between a credit card and a loan, eliminating the drawn-out underwriting process when you need capital. Small businesses can benefit from having an available line of credit.

How does a business line of credit work?

Similar to a credit card, a business line of credit makes funds available to your business with a credit limit. The limit can be anywhere between $1,000 and $250,000. 

It's a revolving line of credit -- you'll be able to access some or all of the credit limit as often as you need, as long as you don't exceed the limit. For example, if your lender approved your company for a business line of credit of $40,000, you can draw $25,000 and still have $15,000 left to borrow. 

Once you draw on your line of credit, you'll need to replenish it by paying back the balance in installments. You'll only pay interest on the portion you borrowed, and you can continue to borrow from the available balance while you pay off the line of credit. There are no limits to how often you draw on a business line of credit as long as you stay within the limit and make timely installment payments.

Once the line is established, you have peace of mind knowing that you have access to the funds right away. You don't have to worry about applying for a loan. Simply transfer funds from the line of credit to your business bank account or write your company a check from the line of credit account.

How to apply for a business line of credit

Getting a business line of credit is similar to a business loan. Before you apply, it's important to make sure your business is established. Most lenders will require that you've been in business for at least six months and can show an annual income of at least $25,000. If your business doesn't have a credit score yet, you may need to guarantee the line of credit personally. 

Once you're ready to apply, shop around for lenders offering business lines of credit. Most banks and credit unions will offer them. If you already have a business bank account, ask about a line of credit since you've already established a relationship with the financial institution. To apply, you will probably need to submit:

  • Two years of personal tax returns

  • Business tax returns

  • Company profit-and-loss statements and a balance sheet

  • Business bank statements

  • Your personal information, such as Social Security number and identification 

The best line of credit lenders

The bank you currently have a business account with is a good place to start. However, traditional banks are more stringent about lending, and it may be difficult for a newer business to get a business line of credit. The following lenders offer business lines of credit:

Image: rafapress / Shutterstock

BlueVine's lines of credit are meant to fund quickly, allowing your business to bridge a cash-flow gap. The APR starts at 4.8% but can climb significantly based on the credit line amount and company/personal creditworthiness. BlueVine provides as much as $250,000. 

To apply, you'll need a credit score of 600 or higher and be in business for at least six months, with $10,000 in monthly revenue. Each time you draw funds, you'll need to pay them back in weekly or monthly installments over six or twelve months.



Image: Credibly

Credibly is a good resource for small business owners with below-average credit. Applicants may be able to qualify for a line of credit for their business with a personal credit score of 560 or higher. In addition, lines of credit are available for as much as $250,000, but its terms may be one of the shortest at 26 weeks (six months). Rates start at 4.80% APR. 

However, applicants with poor credit may see a higher interest rate. You can prequalify for a Credibly business line of credit as long as your business has been running for at least six months and you have an annual income of $50,000 or more.



Image: OnDeck

OnDeck is an online lender providing business lines of credit of $6,000 to $100,000 to small business owners. Its biggest selling point is fast funding; OnDeck promises to fund you in seconds, even on nights or weekends. 

However, the speed and convenience of an OnDeck business line of credit comes at a cost: the APR starts at 35.9%, depending on your creditworthiness and company financials.



Image: Casimiro PT / Shutterstock

Wells Fargo has two lines of credit: BusinessLine for companies older than two years, and Small Business Advantage for newer businesses. The BusinessLine awards as much as $100,000, while the Small Business Advantage line of credit has a maximum limit of $50,000 and five years of credit. 

Rates start at Prime Rate plus 1.75%. Wells Fargo doesn't require collateral, but you'll need to provide personal and company financials.


Wells Fargo

Business lines of credit: The pros and cons

A business line of credit can be a great financial resource for developing and established businesses. However, there are benefits and drawbacks worth considering before you apply for one.


  • You'll only need to apply one time for funding

  • You can draw on the revolving credit line whenever you need capital

  • It can help build business credit

  • You only pay interest on the outstanding balance

  • Lines of credit are typically available for several years -- as long as you keep up with the payments, the credit line should be available


  • The credit limit may be smaller than the amount you'd receive for a small business loan

  • There is usually an annual fee

  • The lender may cancel the line of credit or reduce it

  • Interest may be higher than a business loan

  • You may need to provide collateral

What's the difference between a business line of credit and a loan?

A business loan is awarded for a set amount and has a term length that the loan must be paid back by. A business line of credit comes with a credit limit which could be accessed many times for any amount within the limit. While business loan funding happens only one time, you can draw as much as needed from your line of credit's limit.

Can a new business get a business line of credit?

Most lenders will require that your business has been operating for at least six months. Depending on the lender, you may need to provide financials showing your company has made at least $25,000 per year in income. 

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