A Guide to Line of Credit

A business line of credit is a facility that gives a business the ability to draw from and payback to an available amount of pre-approved credit limit. Money drawn from the credit line is deposited as cash to your operational account and then the available credit left in the line is adjusted. As the credit line is paid back through monthly payments, the available amount of credit is increased.
By Matthew Elling
Co-Founder and Consultant at Line of Credit Depot
May 26, 2022

With a business line of credit you can access funds when you need them and only pay interest on money withdrawn, not the entire facility amount. 

What is a Business Line of Credit?

A business line of credit is a facility that gives a business the ability to draw from and payback to an available amount of pre-approved credit limit. Money drawn from the credit line is deposited as cash to your operational account and then the available credit left in the line is adjusted. As the credit line is paid back through monthly payments, the available amount of credit is increased. A line of credit works similarly to a traditional credit card, where purchases reduce the available credit and payments towards a credit card increases the available credit and decreases the credit balance (money owed from purchases).

A business line of credit is one of the most popular forms of financing for a business, because it affords ease when funds are needed. Also the payback terms and interest rates are generally lower than small business loans. This being said, most businesses are often not qualified for this type of credit due to time in business and other factors. Since this type of financing is generally unsecured, the business and business owner face more underwriting scrutiny during the application process.

The use of a line of credit is endless, whether cash is used for materials, equipment or just general working capital. Some businesses use a line of credit to help finance the business as they await customer payments to arrive. Once their accounts receivables come in, they pay off the withdrawn money to avoid unnecessary interest charges. 


How does a Business Line of Credit Work?

As the line of credit is used, you pay down your debt in monthly payments until the line is replenished to the original credit limit. You are only charged interest on borrowed debt on a monthly or weekly amortization schedule, so you can elect to pay back the withdrawn funds early to catch a break on interest costs. Depending on the bank there may be draw fees, which are charged each time a draw is activated. Also depending on your draw activity, there may be monthly or yearly maintenance fees with a line of credit. 

A revolving credit line is constantly replenished as the debt is paid down. Revolving lines are the most common form of a business line of credit, since a non-revolving line is more like a business loan with fixed payments and the fact that money is not available as the line is paid off.

Business lines of credit can be secured or unsecured. Secured business lines of credit require an asset that the lender uses as collateral during the repayment period. The most common assets used to secure a business line of credit are: Real Estate, Accounts Receivable, Inventory or Equipment. An unsecured business line of credit is not secured with any asset. The rates on secured and unsecured vary depending on the bank, but a good rule of thumb is that a debt that has collateral is less expensive than with no collateral.

Unlike a credit card, business lines of credit have certain timeframes where the entire line has to be paid down to a certain amount, usually zero dollars ($0.00 balance) within a couple of years. Once the line is paid down, businesses can elect (if re-qualified) to reactivate the line of credit or (if the lender allows) term out the balance in the form of a loan.

The cost of lines of credit depend on the creditworthiness of the business as well as the bank rates. Most businesses experience anywhere an annual rate of 4% to 8% for a bank business line of credit. 

Apply for a Business Line of Credit at rates as low as 4.8%. How much are you looking for?
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What is the approval process for a Business Line of Credit?

When a bank is underwriting a business for a line of credit, tax returns and financial statements are requested. A good rule of thumb is to have the following documents available when applying: 2 years business tax returns, year to date financials (income statement and balance sheet) as well as 6 months business bank statements. Sometimes banks will ask for personal tax returns of the business owner. The pre-approval process can take a couple hours to a day or two, but for the line to be activated, it usually takes less than a couple weeks, all depending on how quickly the business provides requested information.

How can I Apply for a Business Line of Credit?

If you want to apply for a line of credit, you can start the pre-qualification process here. We do not run your credit score, so you don’t have to worry about an inquiry. Our platform takes your data and matches it with credit requirements of the top banks in your area. This means that you can choose from different programs offered at different banks. Instead of blindly applying at random banks, without really understanding if you're approved, you can apply with us and save time, money and credit inquiries.

Qualifying for a Business Line of Credit

The personal credit history of the business owner(s) plays a large role in the qualification process. If there is poor credit history or even lack of credit history, a bank may not feel comfortable moving forward with a line of credit. Most banks require a personal credit score of 680 Experian FICO 8.

Time in business in addition to other business characteristics like; profitability, industry and geographical region, play a part in the approval process as well. 

This is why it’s important to make sure that you are applying with the correct lender. All banks credit requirements vary, so applying with the lender that will give you the best rate and term is paramount! 

Before you apply, check to see if you qualify.

No application or obligation.