What Is a Business Line of Credit & How to Use It

A business line of credit offers businesses the flexibility to withdraw funds as needed to help meet their short-term financing goals. For business owners and entrepreneurs, a business line of credit can help keep operations running smoothly, regardless of the ups and downs of sales, seasonal changes, and occasional cash flow shortages.
What is a business line of credit?
A business line of credit allows a business owner to draw funds as needed from their credit line up to the credit limit, and only pay interest on the amount borrowed. The credit line – or maximum loan balance a borrower can take out – and the repayment terms are determined by the lender.
A line of credit can enable a business to pursue opportunities quickly, even when they may not have the cash available to invest.
How does a business line of credit work?
Much like a credit card, a business line of credit is a type of revolving credit, which offers business owners convenient access to funds to help them solve many business financing needs. While most small business loans require an individual to borrow a fixed amount upfront and repay it over a predetermined amount of time, a business line of credit is more flexible. A borrower can draw funds from a business line of credit continuously. The funds are also replenished as they are repaid.
Although terms will vary, borrowers usually pay back a business line of credit on a weekly or monthly cadence. However, some lenders may allow borrowers to pay the balance in full, foregoing interest charges.
Secured vs. unsecured lines of credit
Small business lenders typically offer secured and unsecured forms of funding because borrowers have varying assets, credit histories, and financial situations.
A secured small business loan or line of credit requires borrowers to provide some type of collateral, such as inventory, business property, or another type of assets. The lender has the right to seize the borrower’s collateral if they default on their line of credit. This type of line of credit is typically for those who have bad or limited credit history.
An unsecured small business loan or line of credit doesn’t require borrowers to put up collateral though, lenders may still require borrowers to agree to any of the following:
- A personal guarantee: This means the lender can go after a borrower’s personal assets, like their bank account or home, if they end up defaulting on the line of credit.
- A lien: The lender may make a claim on a business asset related to the unpaid debt if the borrower can’t repay the loan.
Understanding the different options for a small business line of credit and what lenders may require for a borrower to qualify for a loan will help business owners make informed decisions for their small business.
How to use a business line of credit
There are several ways a small business owner who is considering a business line of credit might want to use the funds, such as:
- Securing quick funding for repairs for an unexpected equipment failure
- Using funds to make payroll within a short amount of time
- Helping with gaps when there is a lull in cash flow
- Ordering additional inventory during unexpected surges in sales, like during the holiday season
For example, if a store needed $5,000 to make repairs after some unforeseen damages, and the business owner is approved for a total of $20,000 with a traditional loan, they would be required to take out the total approval amount and begin paying it back with interest.
With a revolving line of credit, a business owner would only pay back what was borrowed ($5,000 in this instance) plus the interest on that amount. $20,000 is simply the total amount that can be taken at one time.
While a business line of credit is a great option to help small businesses navigate cash flow gaps or address unexpected financing needs, they can also be used during times of growth. The funds from a line of credit can help a business owner jump on timely business opportunities, increase marketing or advertising spend, or expand their products or services.
What’s needed to apply for a business line of credit
Online lenders can offer a secured line of credit to businesses with less established credit histories. When comparing options for a business line of credit, it’s important to check lenders’ eligibility requirements before choosing. Some lenders, for example, may require borrowers to agree to personally guarantee a line of credit or meet a certain credit score.
Once a business owner has decided on the line of credit they want, they can then submit an application form. Information typically needed:
- Business details, such as the name, location, and type of business entity
- Contact details for the business
- The borrower’s personal information, such as their name, contact details, and Social Security number (if providing a personal guarantee)
- Collateral being provided, if applying for a secured loan
After submitting this information, the lender will analyze the information and inform the borrower whether they’ve been approved, how much funding they can access, and the fee rate.
Requirements for a business line of credit
While each lender has their own set of eligibility requirements to qualify for a line of credit, here are ones that they typically look for:
- Minimum length of time in business: This could be six months or a year, depending on the lender.
- Minimum annual revenue: This amount might be $250,000 but can vary depending on the type of loan and the credit limit.
- Fair or good credit: The higher a business’ credit score, the better.
Fees associated with a line of credit
Borrowers may also need to pay fees in order to open and maintain a line of credit. Examples of fees include:
- Application or origination fee: This amount may be a flat fee, or a percentage charged, for a lender to process an application.
- Draw fee: This is a charge paid each time a withdrawal is made on the line of credit.
- Maintenance fee: Some lenders charge an annual or monthly fee for a borrower to keep their line of credit loan active.
- Inactivity fee: If a line of credit is not drawn from for a certain amount of time, the borrower may be charged a fee.
How could a line of credit help a business?
While the ideal situation is to have savings to help a business weather storms, the next best thing is to apply for a small business line of credit. A line of credit can help a business owner meet short-term cash needs, such as purchasing supplies or additional inventory, or covering operating expenses. The funds could also be used to invest in crucial aspects of a business to help it grow and thrive.
Revolving credit can provide the flexibility a business owner needs if they know they will need funds soon but are unsure exactly how much will be needed or when.
Frequently Asked Questions
What’s the difference between a business line of credit and a loan?
The differences between a line of credit and a small business loan are subtle, but each one offers certain advantages. Here are three key differences to keep in mind:
- Flexible borrowing: A line of credit allows a business owner to borrow as much or as little money as they need at a time (within a certain credit limit). Traditional loans only offer one fixed amount.
- Interest rates: Traditional financing offers generally fixed rates. A line of credit’s interest rates are usually tied to the market’s variable rate.
- Payment structure: Traditional financing requires a set amount due each month until the loan is paid off entirely. With a line of credit, payment varies from month to month, depending on how much funding was used the previous month.
How are a business line of credit and a credit card different?
Both a line of credit and a credit card are types of revolving credit that only require borrowers to pay interest on the amount they take out. Credit lines typically have higher credit limits and lower interest rates than credit cards, but borrowers may be able to earn cash back or rewards when using business credit cards.
How long does it take to be approved for a business line of credit?
Business owners can often complete an application for a line of credit within minutes, but approval times vary depending on the lender. Online lenders typically make decisions and provide funds in as little as one to two business days, whereas more traditional lenders can take weeks.
It’s important to note that traditional lenders typically prefer to lend to more creditworthy business owners and therefore provide lower interest rates and higher credit maximums. Businesses with no established credit or poor credit histories may have an easier time getting approved for funding from online lenders.
Consider an American Express® Business Line of Credit
The American Express® Business Line of Credit offers flexible access to funding that can help business owners manage their cash flow and cover unexpected expenses, so they can focus on growing their business.
- Quick application: The application is designed to take minutes. When you connect your business accounts to the application, your financial info is reviewed in real time for an efficient decision.
- Only pay fees on what you use: Pay a loan fee only on the amount you borrow during the months you have an outstanding balance.
- Term length options: 6-, 12-, or 18-month loan term options with a corresponding monthly fee.
Terms apply.
Am I eligible for a Business Line of Credit with American Express?
To determine eligibility for an American Express® Business Line of Credit and to move your application forward, you will need to follow the step-by-step instructions to link a business bank account to your application. You can link your accounts with confidence. American Express uses data encryption for your security and “read-only” access to understand your business performance.
In order for your application for an American Express® Business Line of Credit to be approved, you must meet the minimum criteria, including being at least 18 years old and having a minimum time in business of 12 months.
After reviewing their funding options, business owners who need to navigate unexpected gaps in cash flow or finance expansion opportunities for their business can consider applying for a Business Line of Credit today.