What is a Business Line of Credit?
A business line of credit (LOC) gives you a set credit limit, which you can draw funds from as needed. In contrast, business loans typically provide a lump sum of funding upfront, which is ideal for major business expenses or long-term investments. Meanwhile, lines of credit allow you to access funds as needed.
Many businesses like the flexibility and versatility of the line of credit because, unlike a business loan, you don’t have to take the total amount at once and only repay what you draw, plus interest and applicable fees. This enables businesses to manage their cash flow needs more effectively than with a traditional loan.
Lines of credit are an excellent option for covering cash flow gaps and unexpected expenses. Once a credit line is active, you can usually get the funds transferred to your business bank account in as little as 24 hours. The quick funding time is nice to have in your back pocket should a sudden working capital need arise.
Business lines of credit range in terms of credit limits, interest rates, and terms. A business line of credit through United Capital Source offers:
- Credit limit: $1,000-$450,000.
- Terms: up to 18 months.
- Rates: starting at 8%.
- Funding time: 1-3 business days.
Unsecured vs. Secured Business Line of Credit
An unsecured business line of credit means no collateral is involved, although you might need to sign a personal guarantee. Secured business lines of credit mean you offered some form of collateral in case of default. The collateral provides extra security for the lender, hence the term.
Unsecured lines of credit typically have lower credit limits and higher interest rates. If you want a large credit limit, it would be best to offer collateral, such as real estate or liquid assets.
How do Business Lines of Credit work?
Obtaining a line of credit typically requires working with a bank, credit union, or alternative financing facilitator, such as United Capital Source. The financial institution issues the line of credit and your account, from which you can draw the funds.
The money goes into your business checking account. Most lenders can provide same-day or next-day fund transfers once your account is set up. You then use the money for working capital or other business purposes.
Lines of credit usually have terms ranging from three to 18 months. You must repay the draw plus interest within the stated terms. Your monthly payment is determined by the amount you draw, the interest rate, and the repayment term. Monthly payments are scheduled to ensure the outstanding principal is repaid within the agreed timeframe. Your minimum payment due will be set to keep you on schedule to repay the draw within the allotted timeframe.
Revolving vs. Non-Revolving Lines of Credit
A revolving credit line (like we offer here at UCS) replenishes as you pay off the drawn amount. For example, if you have a credit line of $150,000 and draw $25,000, your available credit drops to $125k. Once you pay off the $25,000 (plus interest), the available credit returns to $150,000.
With a non-revolving line, the credit limit decreases each time you draw funds, but doesn’t replenish. Once you’ve drawn and repaid all funds, the account closes, and you must reapply. Revolving lines of credit are the most common.
Unsecured Business Lines of Credit vs. Secured Business Lines of Credit
Many lenders offer unsecured lines of credit, which means it doesn’t require collateral. A secured line of credit is backed by collateral. Typical forms of business collateral used for secured credit lines include inventory, accounts receivable, equipment, or even commercial real estate.
An unsecured line of credit may carry a higher interest rate and a lower credit limit. Secured business lines of credit typically offer an interest rate discount due to the security of the collateral. In most cases, the credit limit for a secured credit line is based on the value of the collateral that has been pledged as security.
Lender-Specific Rules
Some lenders set specific rules on when you must draw funds and how much you can draw at one time. Some lenders mandate that you must make your first draw within 30 days of activating the line. Others state that your first draw must be for a minimum amount, such as $5,000.
Many lenders include a draw fee as part of your line of credit. Draw fees range between 1.6%-2.5% of the draw amount. For example, if you have a 2% draw fee and take out $20,000 against your credit limit, you’ll incur a $400 fee.
What are the rates for a Business Line of Credit?
Business credit line rates can vary significantly, depending on the lender, credit limit, credit history, time in business, and industry. Rates typically range anywhere from 4% to 60% APR. The average commercial line of credit rates range from 6.47% to 7.06%, but can go as high as 60% or more. Lines of credit through UCS start at Prime + 4%.
The average rates for new business lines of credit in Q4 2024 were between 6.47% and 7.06% for fixed-rate lines of credit and 7.39% and 7.92% for lines of credit with a variable interest rate. The starting interest rate for an SBA line of credit as of March 2025 starts at 10.50%.
Lenders aren’t required to display their rates, making it difficult to pinpoint how much you’ll end up paying without applying first. However, some lenders do provide interest rate ranges for comparison. The actual interest rate business applicants receive depends on creditworthiness and monthly revenue.
Let’s look at comparisons for the most popular business credit line lenders.
Wells Fargo
Wells Fargo Bank offers revolving lines of credit ranging from $10,000 to $150,000. The commercial bank doesn’t publish a minimum credit score but does require a minimum of two years in business. It can take up to 10 business days to fund a line of credit with Wells Fargo. The bank’s line of credit interest rates range from Prime + 1.75% to Prime + 9.75%.
Bluevine
Bluevine is a leading financial technology company and online lender that offers lines of credit up to $250,000 on terms of either 6 or 12 months. Interest rates range from 4.8% to 51%. The fintech company also offers a Bluevine business checking account.
Ondeck
OnDeck offers business credit lines ranging from $6,000 to $100,000 on a 12-month term. You’ll need a credit score of 625, at least one year in business, and annual revenue of $100,000 to qualify. The lender uses an APR, which can be anywhere from 29.9% to 97.3%.
Fundbox
Fundbox is an online lending platform that offers short-term lines of credit for small and new businesses. You can obtain a line of credit ranging from $1,000 to $150,000, available on 12- or 24-week terms. Interest rates begin at 4.66% for 12-week terms and 8.99% for 24-week terms.
Am I eligible for a Business Line of Credit?
Lenders establish minimum qualifications, such as a specific credit score, length of time in business, and a certain level of business income. Business income is a key factor lenders consider when determining eligibility and interest rates, as it demonstrates your ability to repay the line of credit. Most lenders look at your business’s financial performance to determine if you have the cash flow to support repayment. Each lender sets different eligibility criteria.
Generally speaking, commercial banks have stricter qualifications and take longer to approve and fund a line of credit. They often require detailed financial statements and a business plan.
Online lenders typically offer lower approval requirements with faster applications and funding times.
At UCS, approved businesses we work with usually meet the following requirements:
- Credit score: 550+.
- Time in business: 6+ months.
- Annual revenue: $75k+.
How to apply for a Business Line of Credit:
Here’s how to apply for a small business line of credit with our network of lenders:
Step 1: Determine how much funding you need
Unlike other loans, LOCs are often not pursued with specific investments in mind. After all, you’re supposed to apply before you need the money. For this reason, aspiring borrowers might not know exactly how much funding to request. So, think about how you’ll most likely use the funds and why you are applying in the first place. This will help us understand why you’re requesting this amount.
Step 2: Gather your documents
Depending on your credit history, you might not need all the following documents. However, it’s better to have them on hand just in case:
- Business bank account statements from the past three months.
- Driver’s license.
- Voided check from your business checking account.
Step 3: Complete the application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a representative
Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive approval
If and when approved, funds should appear in your bank account in 1-2 business days. Once you start drawing funds against your credit limit and paying them off, you’ll begin to build your business credit.
What are the advantages of a Business Line of Credit?
With a business line of credit, you get immediate access to working capital when you need it. You then only have to repay what you borrow and can make minimum payments, unlike a business term loan, where you receive all the money at once and then have to repay it in fixed payments regardless of the circumstances.
The flexibility of a business line of credit enables your business to cover unexpected costs as they arise. Nearly all enterprises encounter unforeseen challenges and require financing to get through them. For example, perhaps you’re renovating a storefront and need extra funds to cover increased construction costs. Or possibly your sales exceeded expectations, and you need extra cash to purchase additional inventory. Whatever the case, a business line of credit gives you access to money when you need it the most.
Compared to a business credit card, lines of credit typically have higher credit limits and lower rates. If you max out your credit card or borrow too close to your credit limit, your credit utilization rate skyrockets, causing interest rates to skyrocket and your credit score to plummet.
Ultimately, business credit lines generally have more lenient approval requirements than traditional business loans. You don’t need a high credit score, high annual revenue, or a long time in business to qualify.
What are the disadvantages of Business Lines of Credit?
Anytime you borrow money, there are intrinsic risks. Here are some of the drawbacks specific to business credit lines.
With the emergence of new fintech-based lending platforms, more online business lenders can offer business lines of credit in as little as 24 hours to businesses with limited credit and a short business history. The drawback is that many of these structures, whether secured or unsecured, tend to have high interest rates and fees. Typically, the lower your credit score, the higher your interest rate will be. If you have a lower credit score, you may need to consider alternative financing options, such as microloans, which often have more flexible qualification criteria.
Lower credit scores and annual revenue typically result in lower credit limits. Traditional lenders can offer higher limits at lower rates, but the qualifications are far more stringent.
Many lenders willing to work with newer businesses or those with less than stellar credit only offer secured lines of credit, meaning you must pledge collateral to get approval. Even when lenders don’t require collateral, they typically require a personal guarantee.
When considering costs, comparing different lenders and understanding all fees can help business owners save money on borrowing. The best time to apply is before you need the money; however, small business owners are often very busy and typically don’t consider applying for financing unless they have an immediate need for cash. But that is precisely the best time to apply. Not only does it ensure you can access your line of credit in real time, but you’ll typically get a better interest rate when your cash flow is strong.
Business Line of Credit pros & cons
Pros:
- Only repay what you draw from the line of credit.
- You can draw the funds immediately.
- Lenders accept lower credit scores.
- You can use the funds for various business purposes.
- It’s possible to get an unsecured line of credit.
- Higher limits than business credit cards.
Cons:
- Lower credit limit amounts, especially for those with poor credit.
- It might require collateral in some cases.
- Most lines of credit require a personal guarantee.
- Higher interest rates with bad credit.
- Unsecured lines of credit carry higher rates and fees.
Frequently Asked Questions
Here are the most common questions about interest for a business line of credit.
How do lenders determine rates for lines of credit?
Lenders consider various factors when determining rates for a business line of credit. Market conditions, including changes in the economic environment, can impact business loan interest rates. From the financial institution’s perspective, the riskier the loan, the higher the interest rate it will charge. Loan costs include not just interest rates but also loan fees and other charges, which can significantly impact the total expense of borrowing.
Some lenders use a factor rate instead of traditional interest rates. Factor rates are expressed as decimals and are multiplied by the loan amount to determine the total cost of the loan. Unlike APR, factor rates do not account for the loan’s time period, so it is essential to convert factor rates into APR for a more accurate comparison of loan options.
Small business bank loans typically have the lowest interest rates but stringent qualifications. The average business loan interest rates range from 6.6% to 11.5% at banks.
Credit History
The first thing lenders try to determine is your creditworthiness. They’ll examine your credit score, and several lenders post minimum credit score requirements. Lenders will often check your credit reports with a credit bureau to assess your personal credit score and overall creditworthiness. Lenders will dig deeper into your credit history to look for other loan defaults, such as foreclosures and bankruptcies, to get a clearer idea of how well you’ve handled borrowing money in the past.
Your Business & Industry
Your personal credit history is essential, and so is your business’s credit. Lenders will look at other business loans you’ve taken, if any. Also, the time you’ve been in business is a factor, as more established companies are far less risky than startups and businesses less than a year old. Finally, your industry makes a difference, as some sectors are considered riskier than others.
Loan Features
The amount you receive for your line of credit also impacts your interest rate. The more you borrow, the greater the risk, so lenders typically charge a higher rate. Additionally, longer repayment terms often come with higher interest rates.
Interest Rates in the Lending Marketplace
Most lenders base their rates, in part, on the average rates across the industry. In particular, Prime rates play a significant role. Most lenders will use the Prime rate plus their spread when setting an interest rate.
What are the other costs of a Business Line of Credit?
Beyond paying interest, the other costs you can expect with a business LOC include fees. We’ve discussed draw fees, but additional fees include:
- Origination fee: Usually 0%-10% of the credit limit when the line is activated.
- Maintenance fee: An annual or monthly service charge for maintaining the line. Some lenders charge either a draw or a maintenance fee, while others charge both.
- Annual fee: A small fee, usually $0 to $175, for servicing the line of credit.
- Late fee: A penalty fee (usually 5%) for missing a payment.
- Closing costs: Fees associated with finalizing the loan, such as loan-packaging fees, real estate appraisals, or business valuations. These costs can vary and should be disclosed by the lender.
Can I get a Business Line of Credit if I have bad credit?
Getting a business line of credit with bad credit may be possible if you have a low credit score, but you will most likely get a higher interest rate. You should also consider lenders that report to the business credit bureaus so that you can help repair your credit as you make payments.
How do I find the right lender for my Business Line of Credit?
There are several considerations when choosing a lender.
Eligibility
First, you should review the lender’s qualification requirements. You want to ensure you meet the eligibility criteria for credit approval.
Credit Limits
You want to ensure the available credit limit meets your business needs. If the lender’s maximum credit limit is lower than what you need, you will need to find a different lender.
Funding Speed
Funding time refers to how long it takes to activate your line of credit. Some small businesses have the luxury of waiting a few weeks for funding, but most require faster funding times.
Rates Comparison
Determine how much a business line of credit costs at different lenders. The best way to compare business loan rates is by using an APR, which illustrates how much you’ll pay to borrow money over one year.
Repayment Period
Most business lines of credit are short-term financing, but there’s still a significant difference between having six months or 18 months to repay. You want to ensure the repayment terms work for your business.
<h2id=compare>How do Business Lines of Credit Compare to Other Business Financing Options?
When evaluating business financing, it’s essential to compare the cost and structure of different funding options. A business line of credit offers flexibility by allowing you to draw funds as needed, paying interest only on what you use.
However, the interest rates can vary widely, depending on the lender, your credit profile, and whether the line is secured or unsecured. Interest rates on business lines of credit can range from 10% to 99% APR. Comparing a business line of credit to a small business loan can help you determine which option best fits your needs.
Let’s take a look at how this compares to other everyday financing products:
- Small Business Administration (SBA) Loans: These government-backed loans are known for competitive terms. SBA loans typically have variable rates that range from 10.5% to 14%. While approval can take longer, they tend to offer lower rates than many private lenders.
- Traditional Banks: Many traditional banks are member FDIC institutions, which means your deposits are insured and your funds are protected up to the applicable limits, providing added security for customers seeking a small business loan.
- Online Loans: These are faster to fund and easier to qualify for, but often come at a cost. Interest rates on online loans may reach as high as 99% APR, especially for borrowers with lower credit scores.
- Business Credit Cards: These are similar to lines of credit, providing flexible access to capital. Business credit cards offer revolving lines of funding, allowing withdrawals up to a credit limit. However, they often carry higher interest rates and fees than a traditional business line of credit.
- Invoice Factoring: This is a specialized option for businesses with outstanding receivables. Invoice factoring allows businesses to sell their unpaid invoices to a factoring company, providing them with quick access to financing. Costs can be lower than those of unsecured credit lines, but they vary based on invoice quality and volume.
- Merchant Cash Advances (MCAs): These offer fast cash based on future revenue, making them accessible but costly. Merchant cash advances provide financing based on past credit and debit card sales, with repayment through a percentage of future sales. Merchant cash advances typically use factor rates and are more costly than lines of credit, but more accessible.
- Peer-to-Peer Lending: A more modern approach, peer-to-peer platforms connect borrowers directly with investors. Peer-to-peer lending enables business owners to secure loans from multiple individual investors, rather than relying on traditional banks. Rates and terms vary, but may be more competitive for businesses with solid credit.
Each financing option has its pros, cons, and ideal use cases. Business owners should consider flexibility, speed, and total repayment cost when selecting the best choice.
Rates for a Business Line of Credit – Final Thoughts
A business line of credit is a powerful financing tool to help your small business, but it’s essential to understand the costs and rates before applying. Commercial banks typically offer lower rates, but qualification is more difficult, and application and funding times are significantly longer.
Online lenders and lending marketplaces offer a quick application process, fast approval, and funding in as little as one to three business days. The tradeoff is that the cost can run higher.
However, you can minimize the costs of an online lender by researching and finding the best lender for your needs and cash flow. Contact us if you have more questions or are ready to apply for a business line of credit. Our loan executives can guide you through the process and answer any questions you may have.
