Discover How to Get a Business Line of Credit for Your Company

by Kieran Daly
April 19, 2024
Discover How to Get a Business Line of Credit for Your Company

Lines of credit offer many distinct business advantages over conventional bank loans. Like loans, you can use them to fund unexpected business expenses, plug short-term holes in your cash flow, and pay upfront for inventory prior to the busy season. Where they differ is that the overall cost of and monthly repayments on a business line of credit are often much lower than standard loans. Plus, approval can be much easier.

Business lines of credit are now the most popular source of funding for U.S. businesses. About 43% of companies choose them for their funding needs, more than the 34% that apply for a loan.

Keep reading to find out how to get a business line of credit for your company.

How Does a Business Line of Credit Work?

Business lines of credit work differently from the small business loans you might get from a traditional bank. In fact, they have more in common with business credit cards than they do with standard-term loans.

Like business credit cards, small business lines of credit, sometimes referred to as revolving lines of credit, grant you a credit limit. This limit is the maximum amount of funding your business can access.

For example, you might be offered a limit of $200,000. In this situation, you can’t borrow more than $200,000 at any one time. But with a line of credit, you only withdraw money when you need to, and it doesn’t have to be for the full amount.

For example, let’s say that you wanted to borrow $50,000 to meet a short-term working capital need or to stock up on inventory prior to a busy season. You’d borrow that $50,000 from your $200,000 line of credit. You’d still have a balance of $150,000 left that you can borrow from.

This differs from a traditional loan, where you’d receive the $200,000 as a lump-sum cash advance. You’d then make monthly repayments on the capital and interest for an agreed period of time.

How Do You Repay a Business Line of Credit?

Like a standard business loan, you make a monthly payment on a business line of credit.

Some lenders require you to pay the interest only on the balance of your facility. Others will want you to pay off the interest and a small proportion of the balance.

If you want to pay down your balance further, you can, just as you can with a credit card. The proportion of the balance you do pay off then becomes available to borrow again.

If you want to, you can clear the balance in part or in full at any time. Unlike the repayment terms of a standard business loan agreement, you’ll not be charged prepayment penalties for doing so.

Each business line of credit has its own terms — meaning that the facility must be paid back in full within an agreed length of time. This can vary between 12 weeks and five years. 

How Much Can I Borrow With a Business Line of Credit?

How much you can borrow with this form of business financing depends on a number of factors including:

  • Maximum amount: Many lenders have a general cap on the maximum they’ll advance to businesses. For example, Backd’s maximum loan amount with a business line of credit is $750,000.

  • Annual revenue: How much you turn over in sales will determine the credit limit you’re offered.

  • Creditworthiness: Lenders will consult with credit bureaus on your personal credit score (FICO Score) and business credit score when determining whether to extend you a line of credit.

  • Time in business: Startup businesses may struggle to secure a lender because they have no track record. Some lenders accept new businesses with only six months in operation, but most want to work with established businesses that have been in operation for at least a year.

  • Collateral: Unsecured business lines of credit won’t require collateral, but if you apply for a secured business line of credit, you will need to offer collateral. You may be able to secure a higher credit limit with a secured line of credit; however, your lender may seize your assets from you if you can’t repay the funds.

Another eligibility requirement for some lenders is that you provide a personal guarantee as a condition of the lending agreement. This means that if your business fails and there is an outstanding balance on the account, they pursue you personally for the money.

This also applies if you have taken out a secured business line of credit and you still owe money after the lender has sold your business assets or real estate that you pledged as collateral.

Do Business Lines of Credit Offer Competitive Rates?

As a rule, business lines of credit you will pay interest at a higher rate with business lines of credit than with business loans. However, lines of credit generally offer lower interest rates than credit cards.

Your credit history matters in deciding the rate you pay too.

Although you can get a business line of credit loan with what is traditionally considered a bad credit score of 560 with some lenders, expect to pay a higher interest rate than other borrowers in these circumstances. 

You may also be able to reduce the rate of interest you pay by choosing a secured line of credit.

How to Get a Business Line of Credit

One question many borrowers have when considering how to get a business line of credit for their company is where should they apply.

Business lines of credit are widely available. You can apply for them at traditional banks like Wells Fargo and Bank of America. Credit card companies like American Express have their own product, as do many credit unions.

The U.S. Small Business Administration allows many of its range of SBA loans to be taken out as lines of credit. You can also apply with online lenders like Backd for this kind of financing option.

What You Need to Provide to Your Lender

Each business line of credit lender has its own application process. Small business owners should expect the lender to ask them to present some or all of the following:

  • Business financial statements (including cash flow forecasts, profit and loss statements, and balance sheets)

  • Tax returns for you and the business

  • Personal and business bank account statements (especially from a standard business checking account)

If you offer collateral when applying for a secured line of credit, you will need to provide proof of ownership and worth. Your lender may also require an independent valuation of certain types of assets like real estate, equipment, and inventory.

How Fast Can You Get a Business Line of Credit?

In general, online lenders turn around applications faster and require less documentation, sometimes within one business day. With traditional lenders, the process may take a few days or weeks, especially on secured lines of credit. 

What Are the Costs of a Business Line of Credit?

Charges between lenders vary, but in addition to interest, you may have to pay some or all of the following when applying for and maintaining a business line of credit:

  • Origination fee: This is charged on acceptance of your line of credit and can range from free to 2% of the limit amount.

  • Draw fees: Some lenders don’t charge draw fees, while others charge up to 2% every time you withdraw money from your line of credit.

  • Maintenance fees: This may be charged as an annual fee or monthly fee. It pays for keeping your account open, similar to fees you might pay on a credit card.

  • Late fees: If you’re late in making a payment, some lenders penalize you for this with a charge of up to 5% of the overdue amount.

  • Inactivity fees: You may have to pay an additional fee if you don’t withdraw money frequently enough from your line of credit.

Apply for a Business Line of Credit With Backd

In this article, we’ve shown how to get a business line of credit and why they’re in such demand from company owners and founders. Lines of credit provide cash when you need it with much more flexible repayment options than standard business loans. They can be used for a wide range of business needs — from cash flow management to meeting unexpected bills.

With Backd, you can borrow up to $750,000 with a business line of credit. Access funds easily through our dashboard, and make weekly repayments over the course of six or 12 months. And every time you pay down the limit, your credit limit automatically reloads.

Apply now in three minutes and get funded as soon as tomorrow.

What would you do with the right amount of capital?

Working Capital Advance

Easy payment structures offer amounts with fast turnaround, Simple and easy process to access working capital.

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Business Line of Credit

Get instant access to revolving credit with unlimited terms, and the best rates for your business.

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  • Soft credit pull that doesn't affect your credit score