This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
What is a business line of credit?
A business line of credit is a flexible financing tool that could help a small business pursue growth opportunities or address cash flow shortages. With a line of credit, a borrower may draw funds as needed up to the available line amount and only pay interest or loan fees on the amount borrowed.
The credit line – or the maximum amount a borrower is approved for – and the repayment terms are determined by the lender.
A line of credit could enable a business to pursue opportunities even when the owner may not otherwise have available cash to invest. Here are some common features of a business line of credit, keeping in mind that rates and policies will differ across lenders.
How does a business line of credit work?
Much like a credit card, a business line of credit may allow a borrower to draw funds repeatedly up to the available line amount without having to reapply each time. Unlike most credit cards, a business line of credit may not have an interest free repayment period.
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 may offer greater flexibility. With some lenders, the line of credit may be replenished as a borrower repays the funds, so long as the borrower remains in good standing with their lender.
Although terms will vary, they may require the borrower to make payments on a weekly or monthly basis.
Secured vs. unsecured loans
Small business lenders might offer secured and unsecured forms of funding.
Secured financing requires borrowers to provide some type of collateral, such as inventory or another type of asset. Unsecured financing does not require collateral, though lenders may still ask borrowers to provide other forms of protection for the lender, such as a personal guarantee of the loan.
What’s needed to apply for a business line of credit
Different lenders may have their own eligibility requirements for a business line of credit. Some lenders, for example, may require borrowers to agree to personally guarantee the funds drawn on a line of credit or meet a certain credit score.
Once a business owner has decided on the lender, they may be asked to provide information, including:
- Business details, such as the name, location, and type of business entity
- Business records and business financial information
- Contact details for the business
- The borrower’s personal information, such as their name, contact details, etc.
- After submitting the required documents and information, the lender will assess the application and inform the borrower whether they’ve been approved, and how much funding they may access.
Fees associated with a line of credit
Borrowers may also need to pay fees 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 fee for each time a loan is drawn on the line of credit.
- Maintenance fee: Some lenders charge an annual or monthly fee for a borrower to keep their line of credit active.
- Inactivity fee: If a line of credit is not accessed and a loan not drawn for a certain amount of time, the borrower may be charged a fee.
How to use a business line of credit
There are many ways that small businesses could use a business line of credit. A business line of credit could help small businesses navigate cash flow gaps or address unexpected financing needs, or to support growth initiatives. Here are six possible uses for a line of credit.
1. Jumping on growth opportunities
Small business owners might have ideas or opportunities for growth without the necessary capital to pursue them. A business line of credit could help capitalize on those opportunities. Business owners could use a business line of credit to help open a new location or fund a marketing campaign. With a line of credit, an entrepreneur may draw the funds they need to pursue promising ideas or opportunities that come their way.
2. Managing cash flow shortages
Small businesses may face cash flow shortages from time to time, due to things like seasonal business trends or a business emergency. A business line of credit offers a potential way to access funds needed to manage through a cash flow crunch.
3. Paying for seasonal inventory
Purchasing inventory or supplies for an upcoming season could be expensive. It could be months before the business recoups their investment. However, without the right inventory, the business could miss out on sales. With a line of credit in place, a business owner could access the funds to cover inventory costs when they need to place an order.
4. Helping out with unexpected repairs
As a small business owner, it’s not uncommon to face unexpected costs for repairs to equipment or facilities. For example, when a company vehicle or computer breaks down, repairs are necessary to keep the business going. The funds from a business line of credit could help relieve cash flow pressure in situations like these.
5. Buying equipment
Having the right equipment could play an important role in growing or expanding a small business. When the owner has a business line of credit, they may access the funds needed to purchase software, machinery, computers, or other equipment to help keep their business moving forward.
6. Repaying vendors
When a business is growing, it’s not uncommon to experience periods of negative cash flow, which could make it difficult to pay vendors on time. Funds drawn from a line of credit could be used to cover bills from vendors and may be a way to get through a temporary cash flow shortfall.
How could a line of credit help a business?
A line of credit could help a business owner meet short-term cash needs, such as purchasing supplies or additional inventory, or covering day-to-day expenses. The loan funds from a line of credit could also help a business owner jump on timely business opportunities, potentially increase marketing or advertising spend, or expand their products or services.
Consider an American Express® Business Line of Credit1
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. You must apply and be approved to gain access to the American Express® Business Line of Credit.
With Business Line of Credit, all loans are subject to credit approval and are secured by business assets. Every loan requires a personal guarantee.
To learn more about an American Express® Business Line of Credit, click here.
Frequently Asked Questions
Below are answers to common questions about using a line of credit for a small business.
What’s the difference between a business line of credit and a loan?
Understanding the difference between a line of credit and a small business loan can help a borrower determine which may be a better option for their business. A business line of credit may allow a borrower to draw from their line on multiple occasions, up to their approved credit limit. Borrowers do not have to reapply with their lender each time they draw from their line of credit. Interest is charged only on the funds that have been withdrawn, not the entire available amount. Other fees may apply to a line of credit, such as a maintenance fee or an inactivity fee.
Business term loans provide a lump sum upfront that borrowers must repay over time. For a borrower to receive additional funds, they may have to apply for another business loan.
How are a business line of credit and a credit card different?
At a high level, both a line of credit and a credit card essentially lend you money and may require you to pay it back with interest. Both a line of credit and a credit card may charge borrowers interest on the amount of funds they take from their line. As these funds are repaid, room within the credit limit is freed up for new borrowing, making both lending types revolving in nature.
Unlike many credit cards, a business line of credit may not have an interest free repayment period. While credit lines could have higher credit limits, borrowers may be able to earn cash back or rewards when using business credit cards.
Are there limits on how a business line of credit can be used?
Like other types of business loans, there may be limits on how borrowers can use a business line of credit. Lenders may have different guidelines governing the use of the funds.
For example, some lenders may not allow borrowers to use funds from a business line of credit for long-term debt payments or capital expenditures, while others may. Checking with potential lenders could help a business owner find out about any limits on using the associated loan funds.
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
Terms and Conditions
1. American Express® Business Line of Credit offers access to a commercial line of credit ranging from $2,000 to $250,000, although some customers may have access to a larger line of credit. Decisions regarding the line of credit amount, loan fees and available installment term options are based on a review of your and your business’s overall financial profile, which may include your credit history, your relationship with American Express and other financial institutions, and other factors. The line of credit amount, loan fees, and installment term options are each subject to review and may change for future loan activity. A review of the line of credit may result in a suspension at any time, accompanied with or without a closure of the line of credit. Not all customers will be eligible for the lowest loan fees or all installment options, and not all industries are eligible. All loans are subject to credit approval, are secured by assets of the borrower, require a personal guarantee, and may be subject to late fees. Loans are issued by American Express National Bank.
Each draw on the line of credit results in a separate installment loan with monthly installments which may include 6, 12, 18, or 24 months, subject to eligibility. When you request a loan, you will be presented with the available installment option(s) and the monthly loan fee for that loan amount. The monthly loan fee is calculated as a percentage of the original principal amount of the loan and is charged monthly during the term of the loan along with a portion of the principal. Currently, the monthly loan fees may range from 0.55% to 1.55% of the original principal amount, but the loan fee offered to you for future loans may change at any time. You will be charged monthly loan fees only for months in which the loan has an outstanding balance.
If you repay the total principal of a loan early, you will not be required to pay the loan fees that have not posted for subsequent months. American Express may offer promotions and may reduce or waive loan fees from time to time.
