A business line of credit solves a different problem than a term loan. Instead of borrowing a fixed amount for a specific purchase, you get standing access to funds you can draw on whenever cash flow gets tight, and you only pay for what you actually use. For most small businesses managing seasonal swings, slow-paying clients, or unpredictable expenses, it is the single most useful financing product to have in place before you actually need it.
Business Line of Credit vs Term Loan
| Business Line of Credit | Business Term Loan | |
|---|---|---|
| How funds are provided | Revolving, draw as needed up to a limit | Lump sum upfront |
| Repayment | Interest on amount drawn, revolving repayment | Fixed installments over a set term |
| Best for | Ongoing or unpredictable cash flow needs | One-time purchases (equipment, property, expansion) |
| Reapplication needed for more funds? | No, redraw within your existing limit | Yes, a new loan for additional funds |
| Typical rate structure | Variable, tied to prime | Fixed or variable, set at approval |
Rates and Limits by Lender Type
| Lender Type | Typical Rate | Typical Limit | Secured? |
|---|---|---|---|
| Big banks | Prime + 1-4% | $10,000-$500,000+ | Often secured for higher limits |
| Credit unions | Prime + 2-5% | $5,000-$250,000 | Varies |
| BDC | Prime + 2-6% | $10,000-$500,000+ | Varies, more flexible on qualifying business types |
| Online business lenders | 8-25%+ (often flat or factor-rate pricing) | $5,000-$150,000 | Usually unsecured |
Bank and credit union lines of credit are the cheapest option if you qualify, but they also require the most documentation and business history. Online lenders approve faster and with less paperwork, at a real cost premium.
How to Qualify
Lenders generally evaluate a business line of credit application on:
- Personal credit score of the business owner(s), especially for businesses under two to three years old where the business itself has limited credit history
- Time in business, with most banks preferring at least one to two years of operating history
- Revenue and cash flow, verified through business bank statements or financial statements
- Existing debt obligations, since lenders assess your business’s debt service capacity alongside your personal finances
- Industry, as some lenders are more cautious with certain sectors (seasonal businesses, restaurants, businesses with high failure rates)
Secured vs Unsecured Business Lines of Credit
A secured line of credit is backed by collateral, most commonly business assets, accounts receivable, inventory, or in some cases a personal guarantee tied to home equity. Because the lender has recourse to a specific asset, secured lines typically come with lower rates and higher limits.
An unsecured line of credit does not require pledging a specific asset, but almost always still requires a personal guarantee from the business owner. Without collateral backing the line, lenders charge higher rates and set lower limits to manage their risk.
Common Uses for a Business Line of Credit
- Covering payroll or rent during a slow revenue month
- Bridging the gap between issuing an invoice and receiving payment
- Purchasing inventory ahead of a seasonal sales period
- Handling unexpected repairs or expenses without disrupting cash flow
- Acting as a backup source of working capital that sits unused until it is needed