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Business lines of credit are flexible forms of financing that borrowers can use as needed. Think of them as credit cards where you only pay fees on whatever is used. Once you pay off your balance, your line of credit is replenished and you can again use however much you were approved for. Because you only pay fees for what you use, they offer a lot more flexibility than, say, term loans, which require you to start paying interest fees as soon as the loan is taken out.
What is a Business or Commercial Line of Credit Used for?
Business lines of credit are best for ongoing expenses like payroll, funding short term projects or any other short term recurring capital needs. As most business lines of credit take at least a business day to fund after you make a draw, they're not the most liquid option here, and if that is your primary concern, we recommend looking at business credit cards. However, they are revolving (meaning your credit line replenishes every time you pay off your balance like a credit card), making them a more appropriate option for ongoing expenditures than, say, a lump sum loan. If you're looking to fund an ongoing marketing campaign or need funding to pay your employees, a line of credit is ideal especially if you're unsure of exactly how much you'll need.
Business Line of Credit Pros:
- Money is readily available
- Credit line replenishes whenever balance is paid
- Interest rates are only incurred when line of credit is used
Business Line of Credit Cons:
- Credit cards should be used for small daily purchases, as lines of credit typically aren't very liquid
- Lines of credit are usually smaller than term loans
- Some interest rates are variable and fluctuate with the economy
Best Unsecured Business Line of Credit: Wells Fargo
Why we like it: It's rare to see a bank offer unsecured lines of credit, but Wells Fargo offers two business lines of credit that don't require collateral. Borrowers will qualify for either depending on their credit. Another rare feature is that banks don't tend to lend to startups or young businesses, but Wells Fargo offers lines of credit to businesses with less than two years of operations. Wells Fargo's line of credit can have a term stretch out to five years, which is quite long compared to competitors. Additionally, qualified borrowers will benefit from some of the lowest rates in the market (usually starting at 6%-7% APR). Wells Fargo is also unique in that borrowers are given a Mastercard to access their line of credit—making it more liquid than others in the market—and access to a rewards program.
Drawbacks: Wells Fargo's lines of credit max out at $100,000, which is toward the smaller end of the spectrum compared to other lenders. Banks also tend to have slower application processing cycles than online lenders, and Wells Fargo doesn't list the average timeline publically. Typically, the processing cycle can take anywhere from a days to weeks. Another major drawback is that borrowers will likely need to have exceptionally strong personal credit scores and/or cash flows. Wells Fargo doesn't make their qualification criteria public, but borrowers typically need to have a FICO credit above 680 and more than $200,000 in annual revenue.
- No personal collateral
- Credit line size of $5,000 to $100,000
- Borrowers can use a Mastercard to access their line of credit and have access to Wells Fargo Business Line Rewards Program
Best Business Line of Credit for Startups: Fundbox
Why we like it: Amongst competitors, Fundbox provides some of the most lenient qualification and age-of-business requirements. Fundbox's business line of credit doesn't require a minimum personal credit score; you have to have been in business for three months with an annual revenue of $50,000, and its fees are also quite competitive as they typically charge 0.7% of your drawn amount per week. This results in a typical cost per dollar of $1.12 to $1.24 depending on the term length. Similar to other online lenders, the turnaround time to have your application reviewed and funds made available is quick—within just a few business days.
Drawbacks: Fundbox does have limitations with the size of the credit line you can get approved for and the length of the credit term. The company’s credit line limit and term lengths reflect the increased risk they're incurring by having such lenient requirements. If you want a revolving line of credit that's above $100,000 and a term longer than 12 or 24 weeks, Fundbox isn't right for you. Additionally, the company does cap the initial draw at $40,000, meaning even if you do get approved for a $100,000 credit line, you can initially only take out $40,000 of that.
- No credit score minimum, no personal collateral
- Requires at least three months of operations and $50,000 in annual revenue
- Maximum credit line of $100,000 with a range of $1,000 to $40,000 for the initial draw
Best Business Line of Credit for Poor Credit: Kabbage
Why we like it: Kabbage offers a line of credit that is particularly attractive to business owners with poor personal credit because it doesn't require a minimum personal credit score. Both Kabbage and Fundbox are alike in this, but Kabbage seems to accept those with lower credit scores as most applicants who get accepted typically have a score of at least 500. You'll need to have been in business for one year with roughly $50,000 in annual revenue or $4,200 in monthly revenue for the last three months, which is on the lower end in the market. The company’s credit line limit tops off at $150,000, and it does set a minimum draw range of $10,000. Kabbage also offers the Kabbage Card, which allows for instantaneous access to your line of credit. This benefit is especially helpful as most other online lenders require you to request access from your line of credit every draw, which can take at least a business day.
Drawbacks: While Kabbage does offer flexibility, fee transparency and lenient qualification requirements, its default credit line limit of $150,000 is lower than most. If you'd like a credit line over $150,000, you'll have to undergo a manual review, and you'll have to have been in business for at least three years with $300,000 in annual revenue. The company does require a business checking or online payment platform like QuickBooks, which is the company’s solution for underwriting and can be a problem for those who don't really operate online. Also, the fees are front-loaded, meaning the early months of the term have the highest fees, which really reduces the incentive to repay your credit early on. Kabbage's cost per dollar borrowed is also quite high, ranging from $1.20 to $1.80 for every $1 borrowed.
- No minimum personal credit score required
- Transparent fee structure
- Kabbage Card allows for instantaneous access to credit line
Best Best Business Line of Credit for Established Businesses: Traditional Banks
Why we like them: Online lenders are ideal for startups and businesses looking for niche benefits (lenient requirements, fast cash, etc.), but traditional banks offer more established businesses with other benefits like rewards programs, more competitive fees and flexible repayment options. This route is most appropriate for companies who can meet some of the stricter requirements of banks, can afford to wait a little longer for funds and can take advantage of things like rewards programs, which typically only banks offer. A typical profile of an established business that can qualify for these tougher lines of credit is 700+ FICO credit score, above $250,000 in annual revenue and more than three years of operations.
Banks Offering Business Line of Credit
|Wells Fargo BusinessLine Line of Credit|
|Wells Fargo Small Business Advantage Line of Credit|
|Chase Business Line of Credit|
|Chase Commercial Line of Credit|
|Bank of America Secured Business Line of Credit|
|Bank of America Unsecured Business Line of Credit|
|TD Bank Small Business Line of Credit|
Great Business Lines of Credit That Didn't Make the Cut
There were quite a few lenders and business lines of credit we really liked but didn't make it onto our list above. Take a look below if you'd like to browse other options:
Why we like it: OnDeck is one of the only lenders that distinctly offers discounts to customers who consistently renew their lines of credit. For example, the company’s credit line incurs APR fees of 13.99% to 39.9%, but repeat customers may be eligible to receive discounts on their rates depending on their credit line standings. Another plus is that while its availability of funds may not be as fast as Kabbage's or BlueVine's business lines of credit, it is able to make funds available within one to two business days. Overall, it's a well-rounded lender.
Drawbacks: OnDeck's stricter requirements may not make it the best fit for new businesses, and its higher APR range don't make it a great fit for companies with lower credit scores or revenue. With an average APR of 32.1%, that immediately makes it one of the more expensive lenders we've reviewed. Additionally, it does require a personal credit score of 600 with an annual revenue of $100,000. To sum it up, OnDeck is a great fit for companies who can clear the minimum requirements and present a strong case for a low risk to get close to the 13.99% end of the APR spectrum. Additionally, if you're looking to build a relationship with a lender and reduce fees over time, OnDeck is right for you.
- Funds made available within a few business days
- APR range of 13.99% to 39.9% with a weighted average of 32.1%
- Personal FICO credit score must be above 600
- Unable to loan out to companies operating in these industries
Why we like it: Street Shares' Patriot Express Line of Credit is one of the best credit lines on the market, with a low revenue requirement, flexible credit terms and low fees. The company’s annual revenue requirement of $25,000 is the lowest we've seen. It also has the largest range of flexibility with a credit term length of three to 36 months. This credit line is extremely competitive, with a cost-per-dollar-borrowed average range of $1.06 to $1.29. However, one of the company’s biggest strengths lies in its customer service—especially if you're a veteran. Although you don't need to be a veteran to apply, the company’s products were all initially designed for veterans by veterans. In other words, if you're a veteran, you'd be working with a team that understands your needs.
Drawbacks: We initially considered Street Shares the best lender for startups, and while the decision was close, we couldn't because of its higher credit score minimum requirement and “minimum age of business” requirement. It requires a credit score above 600 and for you to have been in business for at least a year. In other words, if you're a brand-new startup with a less-than-stellar credit score, Street Shares isn't for you. It has taken companies in the past before who didn't meet all of the requirements, but its cost-per-dollar-borrowed is much higher than the range stated above. Additionally, its credit line limit isn't too high, topping off at $100,000.
- Low cost-per-dollar fees for the majority of customers
- Credit score requirement on the higher end at 620
- Credit line limit hits a $200,000 ceiling
How to Qualify for a Line of Credit
The process to qualify for a line of credit will depend on the requirements of individual lenders themselves, but there are some common standards. The following are crucial to qualifying for a good line of credit with good terms:
- Good credit score (typically above 680)
- Strong cash reserves or strong cash flows
- Age of business and length of time your business has been profitable
- Well-constructed business plan
While the specific requirements differ from lender to lender, each lender will take the above factors into consideration. We recommend businesses first apply for a line of credit with a traditional lender like a bank. Banks will often give the most competitive rates but have longer application processing times and stricter requirements. If you can't qualify with a bank, consider an online lender who often have more lenient requirements and faster funding times but charge much higher rates.
Want to know what the typical requirements are? Here's an aggregated profile of a borrower who would qualify for a line of credit:
|Years in Business||1 year+|
|Loan Amount||Up to $100,000|
|Loan Term||Up to 5 years|
|Repayment Period||6 months after each draw|
|Rates||Variable (Prime Rate + Additional Rate)|
|Recurring Fees||$150-250 annually|
What to Consider When Choosing a Business Line of Credit
The four major differentiators between different lenders and products are the following:
- Minimum Requirements. What are the minimum qualifications to apply? Most lenders will set strict requirements around personal credit scores, the annual revenue your business brings in, how long your business has been in business and what you'll be using the funds for. Most lenders require a minimum credit score of 600, $100,000 in annual revenue and for you to have been in operation for at least a year. Looking at the different requirements across different lenders is the easiest and quickest way to determine what products you'll want to consider and what not to.
- Credit Line Details. What's the size of the credit line I can borrow? Is there a set minimum/maximum that I need to draw on a regular basis? Most products don't require a regular draw, but some might just to keep your rates locked. What are the usage fees? A typical cost-per-dollar borrowed shouldn't exceed $1.70. Of course, this will vary depending on individual applications and how "risky" lenders deem you to be. Are there any maintenance or origination fees? Most of the lines of credit geared toward startups don't have any maintenance or origination fees.
- Application Process. How quickly can you find out if you're approved? If approved, when will you get access to your funds? Do you need funds quickly or can you afford to wait? Online lenders have really helped drive down the timeline in this space. After submitting an application, you should expect a decision within a business day or two, and your funds should be made available within three business days.
- Repayment Terms. How often do you need to repay your borrowed amount? Depending on how your business handles cash, this can be a major factor in what lender or product you select. Most credit lines require weekly payments, but there are others with monthly or more flexible plans, if that's how your business operates.
I know what I want to apply for. Now what?
Once you've identified the lender and product you want to use, take a look at the lender’s website. Most lenders will offer online applications that can be easily filled out within minutes. If you still have questions, lender websites will typically have the company’s contact info attached to the application as well or a chatbox where you can quickly connect to a real person. They'll be ready to answer any and all questions on your product, and their job is to help making filling out the application easier. For some lenders, you might have to fill out a written application, depending on the size of the credit line you're applying for.
Either way, you should get a response in anywhere from minutes to several business days, depending on the lender. The amount of time it takes to then get access to your funds will depend on the specific product itself. Be aware of any promotions that incentivize you to make draws early on in the term. For example, some lenders will waive certain fees if you draw a certain amount within a number of weeks after your line has been opened.
What should I do once my business line of credit becomes active?
Pay careful attention to what you use your line of credit for. As stated above, you should use your line of credit for expenses that will generate a quick return. In a perfect world, you'd pay off your balance immediately after you use your credit to avoid fees. Usually, the bulk of fees will come from usage or interest fees on the credit that you use, so you shouldn't feel pressured to use it. Also, pay careful attention to the repayment plan. Lines of credit typically have repayment schedules that are more regular (weekly) than most businesses are used to.
If you want to continue operating with your line of credit, good standing with your lender is crucial. Don't make late payments, otherwise your lender may not renew the line of credit with you or may increase the fees and reduce the credit limit. On the flipside, if you always make your payments on time and use your credit enough to show that you're a reliable customer, you may get your credit line increased and fees reduced.
Business Credit Card vs. Business Line of Credit vs. Loans: What's The Best Option for You?
Business credit cards are best suited for frequent everyday business expenses. Credit cards are structured with lower credit limits and high fees. However, they're also the most liquid form of credit a business can use, making them ideal for daily expenditures. For example, if you're looking for a financing option to buy office supplies on a regular basis or take out clients week to week, credit cards are the right option.
Business lines of credit are best for ongoing expenses like payroll, funding short term projects or any other short term capital needs. As most business lines of credit take at least a business day to fund after you make a draw, they're not the most liquid option here, and if that is your primary concern, we recommend looking at credit cards. However, they are revolving (meaning your credit line replenishes every time you pay off your balance like a credit card), making them a more appropriate option for ongoing expenditures than, say, a lump sum loan. If you're looking to fund an ongoing marketing campaign or need funding to pay your employees, a line of credit is ideal especially if you're unsure of exactly how much you'll need.
Loans of all kinds are typically best for larger and infrequent business expenses. Loans differ from credit cards and lines of credit, given they're typically issued as a lump sum source of financing. As loans aren't revolving, there is a finite limit to how much you can finance, so we recommend you have a good sense of how much you're looking to spend before applying for a loan. If you apply for a loan, you're going to have to pay back your principal amount with interest and fees attached. If you want to buy a new office space or spend money on a large, one-time expense that you feel will generate enough revenue that exceeds the debt, loans are the right option.