How to Get a Business Line of Credit: A Comprehensive Guide

If
you’re
in
need
of
financing
for
your
small
business,
but
you’re
not
sure
how
much
funding
you
need
and
don’t
want
to
pay
interest
on
money
you
don’t
use,
a

business
line
of
credit
might
be
right
for
you.

A
business
line
of
credit
is
a
flexible
financing
option
that
is
analogous
to
a
credit
card.
If
you
qualify,
you’ll
be
approved
for
a
maximum
limit,
then
you
can
draw
on
that
amount
when
you
need
cash,
but
you
only
pay
interest
on
the
amount
that
you
use.

So
now
that
you
know
what
a
business
line
of
credit
is,
let’s
look
at
how
you
can
get
one
for
your
small
business.

In
this
article:

How
Does
a
Business
Line
of
Credit
Work?

Business
lines
of
credit
usually
have
two
phases:
a
draw
period
and
a
repayment
period.

During
the

draw
period
you
can
borrow
funds
up
to
a
preset
limit,
with
interest
accruing
on
borrowed
amounts.

Repayment
can
start
during
the
draw
period
or
afterward,
following
a
structured
schedule
until
the
borrowed
sum
is
repaid
in
full.
It’s
crucial
to
note
that
interest
rates
on
these
credit
lines
are
often
variable,
meaning
they
can
change
over
time.

So
for
example,
if
you
have
a
$10,000
business
line
of
credit,
but
you
only
use
$2,000
of
it,
you’ll
only
pay
interest
on
that
$2,000.
If
you
need
more
cash
for
your
business,
you
can
always
draw
on
the
remaining
$8,000.
And
as
you
repay
that
$2,000,
the
amount
that
is
available
for
you
to
draw
on
goes
back
up
accordingly.

What’s
the
difference
between
a
bank
line
of
credit
and
a
fintech
line
of
credit?

While
both
bank
and
fintech
lines
of
credit
serve
the
purpose
of
providing
access
to
funds
when
needed,
fintech
lines
of
credit
often
excel
in
terms
of
accessibility,
speed,
and
technological
integration,
while
traditional
bank
lines
of
credit
may
offer
lower
interest
rates
and
more
established
customer
service
channels.

Bank Line of Credit	FinTech Line of Credit
Funded by traditional banks	Funded by FinTech Companies
In-person, paper application process	Streamlined, digital application
Often has lower rates and higher fees	Often has higher rates and lower fees
Less flexibility in terms	More flexible and customizable terms
Limited digital interfaces	Advanced digital tools
In-person support at branches	Online support

Steps
to
Getting
a
Business
Line
of
Credit

If
you
think
a
business
line
of
credit
is
right
for
your
needs,
follow
these
steps
to
get
started.

1.
Assess
Your
Business
Needs

Before
you
start
the
application
process,
take
some
time
to
assess
your
business’s
financial
needs.
Determine
how
much
credit
you
require
and
what
you’ll
be
using
it
for.

While
you
may
need
the
money
for
covering
day-to-day
expenses,
purchasing
equipment,
or
funding
a
specific
project,
having
a
clear
understanding
of
your
financial
goals
will
help
guide
your
application.

2.
Check
Your
Credit
Score

Your
personal
and

business
credit
scores
play
a
significant
role
in
the
approval
process
for
a
business
line
of
credit.
Lenders
will
scrutinize
your
credit
history
to
assess
your
creditworthiness
and
risk
level.

While
building
your
credit
profile,
aim
for
a
credit
score
of
680
or
above
to
increase
your
chances
of
approval.
If
your
credit
score
is
less
than
stellar,
work
on
improving
it
before
applying
for
a
line
of
credit.

3.
Gather
Your
Financial
Documents

Lenders
will
want
to
see
a
variety
of
financial
documents
to
evaluate
your
business’s
financial
health.

These
may
include
tax
returns,
bank
statements,
profit
and
loss
statements,
balance
sheets,
and
cash
flow
projections.
Be
prepared
to
provide
these
documents
to
support
your
application.

If
you’re
applying
for
a
line
of
credit
from
a
traditional
bank,
make
sure
you
have
paper
copies
in
addition
to
digital
ones.
For
FinTech
lines
of
credit,
you
will
likely
only
need
digital
records.
Some
FinTechs
even
allow
you
to
seamlessly
connect
your
bank
or
other
relevant
accounts
to
their
applications
for
a
seamless
experience.

4.
Submit
Your
Application

The
next
step
is
to
submit
your
application
to
your
bank,
or
if
you’re
applying
for
a
FinTech
line
of
credit,
online.
Be
thorough
and
accurate
when
completing
the
application
form,
and
don’t
leave
any
blanks
unanswered.
Most
digital
applications
will
flag
these
errors
for
you
to
ensure
your
application
has
a
faster
processing
time.

5.
Wait
for
Approval

After
you’ve
submitted
your
application,
the
waiting
game
begins.
The
approval
process
can
vary
from
a
few
days
to
a
few
weeks
depending
on
the
lender
and
the
complexity
of
your
application.
FinTechs
generally
have
a
faster
processing
time
than
traditional
banks,
and
may
be
able
to
approve
your
application
within
hours.

Be
patient
and
responsive
to
any
requests
for
additional
information
or
documentation.

6.
Review
the
Terms

If
your
application
is
approved,
carefully
review
the
terms
and
conditions
of
the
line
of
credit
agreement
before
signing
on
the
dotted
line.

Pay
close
attention
to
interest
rates,
fees,
repayment
terms,
and
any
other
important
details.
Make
sure
you
fully
understand
your
obligations
as
a
borrower.

Costs
of
a
Business
Line
of
Credit

While
a
business
line
of
credit
can
provide
valuable
financial
flexibility,
it’s
essential
to
understand
the
associated
costs
and
other
requirements
involved.
Here
are
some
common
fees
you
may
encounter:

Interest

Like
any
form
of
borrowing,
you’ll
typically
pay
interest
on
the
funds
you
use
from
your
line
of
credit.
Interest
rates
for
a
new
line
of
credit
is
typically
between
7%
to
9%,
although
it
can
vary
depending
on
factors
such
as
your
creditworthiness,
the
lender’s
policies,
and
prevailing
market
rates.

Origination
fee

Depending
on
the
lender
you
use,
you
may
have
to
pay
an
origination
fee
for
the
business
line
of
credit.
Origination
fees
usually
range
from
about
0.5%
to
5%
of
your
total
loan
amount.

Draw
Fees

Some
lenders
may
charge
a
fee
each
time
you
draw
funds
from
your
line
of
credit.
This
fee
is
usually
calculated
as
a
percentage
of
the
amount
drawn.

Processing
Fees

There
may
be
upfront
processing
fees
associated
with
opening
a
business
line
of
credit.
These
fees
cover
the
cost
of
underwriting
and
approving
your
application.

Late
Fees

If
you
fail
to
make
timely
payments
on
your
line
of
credit,
you
may
incur
late
fees
or
penalties.
Late
fees
can
add
up
quickly
and
negatively
impact
your
credit
score.

Annual
Fees

Some
lenders
may
charge
an
annual
fee
for
maintaining
access
to
your
business
line
of
credit,
regardless
of
whether
you
use
the
funds.

Early
Repayment
Fee

This
is
a
penalty
for
repaying
the
loan
ahead
of
schedule.
Lenders
may
impose
this
fee
to
compensate
for
the
interest
income
they
would
have
earned
if
you
had
continued
to
make
payments
over
the
original
term.
It’s
important
to
be
aware
of
this
fee
when
considering
early
repayment,
as
it
can
impact
the
overall
cost-effectiveness
of
using
the
line
of
credit.

Common
Application
Mistakes

When
applying
for
a
business
line
of
credit,
avoid
these
common
pitfalls:

Neglecting
Your
Credit
Score

Your
credit
score
is
a
critical
factor
in
the
approval
process.
Make
sure
to
check
your
credit
report
regularly
and
address
any
errors
or
issues
that
could
negatively
impact
your
score.

Overlooking
Financial
Documentation

Be
thorough
when
providing
financial
documents
to
support
your
application.
Incomplete
or
inaccurate
information
can
delay
the
approval
process
or
result
in
rejection.

Applying
for
Too
Much
Credit

While
it’s
tempting
to
request
a
large
credit
limit,
be
realistic
about
your
business’s
borrowing
needs.
Applying
for
more
credit
than
necessary
can
raise
red
flags
with
lenders
and
decrease
your
chances
of
approval.

Drawbacks
to
Lines
of
Credit

A
business
line
of
credit
can
be
a
valuable
financial
tool,
but
like
any
financial
product,
it
comes
with
potential
pitfalls.
Here
are
some
common
ones
to
be
aware
of:

• 
  Overborrowing:
  It’s
  tempting
  to
  max
  out
  a
  line
  of
  credit,
  especially
  when
  it’s
  readily
  available.
  However,
  borrowing
  more
  than
  your
  business
  needs
  can
  lead
  to
  financial
  strain
  down
  the
  line,
  as
  you’ll
  have
  to
  repay
  the
  borrowed
  funds
  along
  with
  interest.
• 
  Dependency:
  Relying
  too
  heavily
  on
  a
  line
  of
  credit
  to
  cover
  ongoing
  expenses
  can
  indicate
  underlying
  financial
  issues
  within
  your
  business.
  Using
  it
  as
  a
  band-aid
  solution
  rather
  than
  addressing
  root
  problems
  could
  lead
  to
  a
  cycle
  of
  debt.
• 
  Credit
  Score
  Impact:
  Just
  like
  with
  personal
  credit
  cards,
  using
  a
  business
  line
  of
  credit
  affects
  your
  business
  credit
  score.
  Late
  payments
  or
  high
  credit
  utilization
  can
  damage
  your
  credit
  score,
  making
  it
  harder
  to
  secure
  favorable
  terms
  on
  future
  financing.
• 
  Unexpected
  Fees:
  Read
  the
  fine
  print
  carefully.
  Some
  lines
  of
  credit
  come
  with
  fees
  for
  things
  like
  maintenance,
  drawdowns,
  or
  early
  repayment.
  These
  fees
  can
  eat
  into
  your
  available
  funds
  and
  increase
  the
  overall
  cost
  of
  borrowing.
• 
  Renewal
  Risk:
  Lines
  of
  credit
  are
  typically
  renewable
  annually
  or
  semi-annually.
  Your
  lender
  reserves
  the
  right
  to
  not
  renew
  your
  line
  of
  credit
  based
  on
  changes
  in
  your
  business’s
  financial
  health
  or
  market
  conditions.
  Losing
  access
  to
  a
  line
  of
  credit
  can
  be
  problematic
  if
  your
  business
  relies
  on
  it
  for
  liquidity.
• 
  Term
  Mismatch:
  If
  you’re
  using
  a
  line
  of
  credit
  to
  fund
  long-term
  investments,
  there
  may
  be
  a
  mismatch
  between
  the
  short-term
  nature
  of
  the
  line
  of
  credit
  and
  the
  long-term
  payback
  period
  of
  your
  investments.
  This
  can
  lead
  to
  cash
  flow
  problems
  when
  it’s
  time
  to
  repay
  the
  borrowed
  funds.

To
mitigate
these
pitfalls,
it’s
essential
to
borrow
responsibly,
have
a
clear
repayment
plan
in
place,
and
regularly
reassess
your
business’s
financial
health
to
ensure
that
borrowing
is
still
necessary
and
sustainable.

Alternatives
to
a
Business
Line
of
Credit

While
a
business
line
of
credit
can
be
a
valuable
financing
tool,
it’s
not
the
only
option
available
to
small
businesses.
Before
you
decide
on
a
financing
product,
shop
around
different
lenders
to
see
what
products,
terms,
and
rates
they
offer.
Doing
so
will
ensure
that
you
find
the
best
product
for
your
needs,
which
can
have
a
lasting
impact
on
your
business
in
the
near
and
long
term.

Here
are
some
alternatives
to
be
aware
of:

1.
Small
Business
Loans

If
you
need
a
lump
sum
of
capital
for
a
specific
purpose,
a

small
business
loan
may
be
a
better
fit.
These
loans
typically
have
fixed
repayment
terms
and
may
offer
lower
interest
rates
than
a
line
of
credit.

If
you
think
a
term
loan
is
a
good
fit
for
your
needs,
contact

Biz2Credit
to
learn
more
about
our
small
business
loans.

2.
Business
Credit
Cards

For
smaller
expenses
or
short-term
financing
needs,
a

business
credit
card
can
provide
convenient
access
to
funds.
Look
for
cards
with
rewards
programs
and
low
introductory
APRs
to
maximize
benefits.

The
key
difference
between
a

business
credit
card
and
line
of
credit
is
that
the
business
credit
card
is
likely
to
have
higher
interest
rates
and
makes
it
harder
to
withdraw
cash,
but
at
the
same
time
you
won’t
pay
interest
on
the
credit
you
use
unless
you
are
late
making
a
payment.

3.
Invoice
Financing

If
your
business
relies
on
invoicing
customers
for
payment,
invoice
financing
can
help
bridge
gaps
in
cash
flow.
This
option
allows
you
to
borrow
against
outstanding
invoices
to
access
funds
quickly.

4.
Merchant
Cash
Advances

For
businesses
with
consistent
credit
card
sales,
a
merchant
cash
advance,
or

revenue
based
financing,
offers
a
lump
sum
of
cash
in
exchange
for
a
percentage
of
future
credit
card
sales.
It
provides
fast
and
convenient
funding
for
business
owners
who
need
it.

It’s
not
a
loan,
so
there
is
no
fixed
term
or
interest
rate.
Payments
are
flexible
based
on
business
performance.
However,
it
can
come
with
higher
interest
rates
and
fees
than
other
types
of
funding.

The
Right
Financing
for
Your
Small
Business

In
the
end,
it’s
helpful
to
review
the
financing
products
available
to
your
business
before
deciding
where
to
apply
for
financing.
That
means
researching
the
financing
options
mentioned
above,
and
even
talking
with
a

financing
specialist
who
can
answer
your
questions
and
help
find
the
right
solution
for
your
business
needs.