Best Small Business Line of Credit Lenders & How They Work

BusinessCredit

Even small business owners can get a revolving, unsecured business line of credit today with minimal paperwork and no personal guarantee. Several online lenders will also approve your business credit line application based on gross monthly revenues rather than business credit scores.

How it Works

A business line of credit is great for paying business expenses, and in that, you only have to pay interest on what you borrow. Credit lines can also be similar to a business loan in that they provide easy access to withdraw your entire credit limit in cash. Like loans, lines of credit usually also have lower interest rates than cards and more favorable payback terms.

Drawbacks

Unlike business cards, most revolving business credit lines do not allow you to make small withdrawals. When drawing funds from your line you might have to withdraw a minimum of $5,000 rather than being able to only take a small amount. Usually, you will not be able to exceed your credit limit either, and can only borrow up to your exact credit limit.

Terms

Where credit cards have an expiry date that may be several years in the future, business credit lines have set terms that range from 1-2 years. During this time you can draw funds from your line at any time.

When making regular payments, you’ll regain some of your available credit minus any withdrawal fees or interest charges. Once your term is up, you will need to have paid off your credit line in full or see if you can be approved for an extension.

Usage

Unlike a term loan, you can use money from a revolving business line of credit whenever you need it. For the entire length of your agreed-upon term, your credit line will provide ongoing access to working capital up to your credit limit.

Rather than having your purchases restricted, you’ll also be able to use your line of credit for whatever purpose you see it. You can draw funds to pay bills, cover payroll, purchase more inventory or buy new equipment. You can even use it to re-open or expand your business or hire new employees.

Simply put, if you need money quickly, it’s there for the taking. When you don’t need to draw from your credit line, you won’t have to pay interest on anything but what you’ve already borrowed. As you pay down your balance, your available funds will get replenished.

Fees

There are some additional fees and costs associated with business lines of credit that you need to be aware of, especially when borrowing from alternative online lenders.

  1. Origination fee: A administration fee that some lenders charged to process y.our application
  2. Maintenance fee: This is can be either a one-time, annual, or monthly maintenance fee that is charged to keep your business line of credit active.
  3. Draw fee: A withdrawal fee that is charged each time you draw funds (borrow money) from your credit line.
  4. Inactivity fee: Some lenders may charge this fee after a specific amount of time where you have not drawn any new funds.

Types

You can choose between four types of business credit lines. Revolving or non-revolving lines of credit usually relate to funds being replenishable or not. An unsecured credit line generally means that no personal guarantee or collateral is required, while a secured line may require one or both.

Unsecured

Unsecured lines are loans that are riskier for the lender because you don’t put up collateral for the loan. Unsecured loans can offer higher amounts, and additional flexibility due to higher funds and can help you build a relationship with lenders. However, they come with additional costs, can come in shorter loan terms, and may come with higher interest rates.

Pro-tip: To avoid having to run up a balance on your business line of credit, add to your business savings whenever possible. By building a financial nest egg, you’ll be less vulnerable to cash flow shortfalls and will reduce your need to borrow.

Secured

A secured business line of credit means that you personally have to guarantee its payback or your company has to offer up collateral. This type of credit line involves a lot more risk for the borrower but usually comes with some perks. Secured credit lines usually come with higher limits, lower interest rates, and more favorable terms.

Personal liability should be avoided wherever possible, as if you default on business payments, you’ll be placing your personal assets and credit at risk. If you offer up collateral that too can be taken due to non-payment.

Revolving

This type of business credit line allows you to draw funds within your approved credit limit, while every payment you make helps replenish your balance. As long as you make your payments on time, you will be able to make as many withdrawals as you like while your credit line is still open.

Non-Revolving

Like a revolving credit line, you only have to pay for what you borrow from a non-revolving credit line. The main difference between the two is what happens when you make a payment. In a revolving credit line, your available funds will be replenished with each payment you make, whereas a payment to a non-revolving credit line will not.

One exception to this rule is when withdrawals are treated as separate cash advances that are independent of each other. Even though these payments might replenish your balance, they are still usually considered non-revolving lines because they don’t work in the traditional sense.