No matter what industry you operate in, how long you’ve been in operation, or the size of your business, small business owners will face a number of challenges if cash flow is tight or inconsistent, such as covering unexpected expenses, paying for suppliers and payroll, and financing expansion and growth.
Third-party financing can help your small business bridge these cash flow gaps so you can continue to operate at your best and grow your business.
From traditional sources of funding like Small Business Administration (SBA) loans and term loans to alternative lending options like merchant cash advances and invoice factoring, small business owners have a number of funding options at their disposal. Determining the right type of funding for your business can be challenging, especially if you’re focused on running your business.
Traditional, long-term loans from lenders like the SBA and banks are often the most commonly recommended form of small business financing, but in some cases, these loans may not actually be the best option. For some businesses, flexible funding options like business lines of credit will more effectively support business growth than a long-term loan.
Ideal for businesses that are looking for a cushion to fill in cash flow gaps or manage emergency costs, or business owners who need flexible access to working capital, business lines of credit are one the easiest and fastest ways to secure funds that you can use to boost cash flow, expand, or keep your business running smoothly.
Keep reading to learn more about business lines of credit, including:
- What is a business line of credit?
- How do business lines of credit work?
- Business lines of credit vs. loans
- How can you use a business line of credit?
- Who can benefit from a business line of credit?
- How to get a business line of credit
- Business line of credit requirements
- Business line of credit interest rates and fees
Let’s jump in.
What Is A Business Line of Credit?
A business line of credit provides a maximum credit amount from which funds can be drawn and repaid as needed, rather than a lump sum that is repaid in set monthly installments.
Available from traditional lenders, credit unions, and alternative online lenders, business lines of credit are one of the most flexible forms of small business funding. They can be secured or unsecured, depending on the strength of your application, the credit limit you are seeking, and what kind of lender you’re working with:
- Secured lines of credit are typically available from banks and credit unions and will require collateral as a guarantee for the financing. A Uniform Commercial Code (UCC) filing must also be completed.
- Unsecured business credit lines do not require collateral, which means the lender assumes more risk in the event that the borrower defaults. As a result, unsecured business line of credit interest rates are higher and approval requirements might be more demanding depending on which type of lender you’re working with. Banks and other traditional lenders may approve an unsecured line of credit if you have an exceptionally strong credit history, while alternative lenders will have more flexible approval requirements that typically don’t require collateral and which are favorable to more small businesses, including those with lower credit scores.
How Do Business Lines of Credit Work?
Business lines of credit operate much like a credit card, but with lower interest rates and higher limits.
Businesses can withdraw from their credit line as needed and will only ever pay interest on the amount borrowed (not the total funded amount like a loan). Once repaid, the entire credit line amount is restored. You may also be able to increase your credit limit after one successful round of funding, and there are no restrictions on how funds can be used.
Business Line of Credit vs. Loans
Business lines of credit differ from traditional loans in a number of ways:
- Credit lines allow small businesses to withdraw funds as desired and pay back the amount used plus interest, just like a credit card. Traditional term loans, on the other hand, will provide a lump sum of cash that is repaid in set monthly installments, plus interest, regardless of whether or not the funds are used.
- Lines of credit usually have variable interest rates, whereas business loans are more likely to have fixed rates.
- Business lines of credit typically have a lower limit than business loans—usually around $500,000 instead of $2 million like some loans.
- There are no restrictions on how business lines of credit can be used, while some business loans are more strict about which expenses the funding can be used to cover.
Compare business lines of credit vs. loans in the table below:
|Traditional Lenders||Alternative Lenders||Peer-to-peer Lending|
|Institutions||Canada Small Business Financing Program, banks, credit unions||Direct online lenders like Greenbox Capital or OnDeck||Online lending platforms like Funding Circle, Peerform, or Upstart|
|Loan types||Term loans, real estate loans, equipment loans, business lines of credit||Merchant cash advances, invoice factoring, business lines of credit, alternative term loans||Term loans|
|Loan amounts||Up to $2M||Up to $500,000||Up to $500,000 depending on the platform and business profile|
|Term lengths||Up to 25 years||Typically 1-3 years||Up to 5 years|
|Fees||Typically lower rates than alternative lenders. Other fees will apply depending on the lender.||Rates may be higher depending on your business’s financial history.||Range from 3.50% to 35.99% APR|
|Eligibility||Only businesses with strong financial histories and very high credit scores are approved.||Flexible approval requirements that are based on business potential rather than financial history.||Approval requirements depend on the lending marketplace.|
|Time in business||2+ years||6+ months||Approval requirements depend on the lending marketplace.|
|Approval timeline||Weeks or months||As little as one business day||Within 5 business days|
Business Line of Credit Requirements
Lenders will consider the following business line of credit requirements when evaluating your application:
- Revenue: All lenders will evaluate your business’s revenue and cash flow when assessing your application for a business line of credit. Traditional lenders may require up to three years of detailed financial documentation, while alternative lenders like Greenbox Capital® are often satisfied with three months of bank statements and at least $25,000 a year in revenue.
- Cash flow: Businesses that are profitable with strong, consistent cash flow will be able to qualify for larger lines of credit with lower rates.
- Vendor payment history: Repaying other business debts on time will result in more favorable interest rates.
- Years in business: Traditional lenders will require your business to be in operation for at least two years, while alternative lenders typically only require your business to be in operation for at least six months to qualify. Startups may have a more challenging time being approved for a business line of credit, but the longer you have been in business, the less investment risk there is for the lender and the lower your rates will be.
- Industry type: While all industries can apply for a line of credit, certain businesses are riskier than others and will have a harder time being approved (though they will still have a higher chance of success than a bank loan).
- Public records: Any red flag in public records, such as previous bankruptcy, may disqualify you from being approved.
- Personal credit: Having good personal credit is an excellent signal for lenders to approve your application. Learn more about personal and business credit.
Business Line of Credit Interest Rates
Business line of credit interest rates depend on your business’s risk assessment, as well as the type of lender you’re working with.
Traditional lenders will use standard interest rates for business lines of credit, meaning you’ll pay a certain percentage every month depending on how much of the line you’ve used. Interest rates typically range anywhere from 5% up to 20% and may be variable depending on the federal prime rate. Businesses with stronger financial histories or those that secure their line of credit with collateral will receive lower interest rates.
Alternative lenders use a factor rate instead of an interest rate. Factor rates are simple decimal figures that show how much “extra” you owe on top of what you’ve borrowed. The factor rate is multiplied by the funding amount to determine the total cost of financing; for example, if your desired funding is $100,000 and the factor rate is 1.3, the total cost of funding is $130,000 to be paid over the set terms such as 12 months. Your factor rate will depend on your risk assessment, but these rates typically range between 1.1 and 1.5.
How Can You Use a Business Line of Credit?
Small business lines of credit are ideal for businesses that are expanding and searching for unrestricted funds to support their growth or day-to-day operations. In this case, “unrestricted” means that the line of credit can be used for any business expense that the owner sees fit.
Use your business line of credit for:
- Expanding to a new location
- Pursuing other growth opportunities, such as purchasing another business
- Acquiring business assets, such as inventory or equipment
- Financing a merger or acquisition
- Investing in a marketing team or strategy
- Paying for renovations
- Covering payroll or other expenses
- Filling cash flow gaps between projects or during a slow season
- Funding other growth strategies
Who Should Apply for a Business Line of Credit?
Almost all businesses can benefit from a business line of credit regardless of industry, how long it’s been in operation, or the size of your business.
Credit lines are an especially good fit if your small business needs extra cash flow during a slow season, has short-term expenses, or has customers who take more than 30 days to pay.
Industries that may be considered “high risk” may also have an easier time qualifying for a business line of credit than a traditional bank loan.
How To Get a Business Line of Credit
The approval process for a business line of credit depends on the lender you’re working with. Traditional lenders like banks will have stricter approval requirements that are based on your financial and credit history, and will often require collateral, and for your business to be in operation for at least two years.
While alternative lenders will also consider your financial and credit history, these lenders have more flexible approval requirements that are based on the future potential of your business. Collateral is typically not required, and most of these lenders (including Greenbox Capital) only require your business to be in operation for six months.
Is A Business Line of Credit Right For Your Business?
With an alternative lender like Greenbox Capital, the application process for a business line of credit is streamlined, fast, and easy. Simply fill out an online form and a Funding Advisor will reach out to you within an hour (during regular business hours) to discuss your funding options and review your three months of bank statements. Once approved, you can receive up to $500,000 of business line credit in under 24 hours. Repayment will be automatically deducted from your daily or weekly sales.
Apply for a business line of credit online today with Greenbox Capital and grow your business to the next level.