A company credit line is one of the most flexible financial tools for businesses. It provides access to funds whenever you need them, helping to cover payroll, purchase inventory, or handle unexpected expenses. Unlike traditional loans, a credit line allows you to borrow as needed — and you only pay interest on what you use.
This guide will walk you through the types of company credit lines, how they work, the costs involved, and how to apply for one. If you’re looking for a financial safety net for your business, a credit line might be the perfect solution.
What is a Company Credit Line?
A company credit line, also known as a business line of credit, is a flexible financing option that allows businesses to borrow money up to a certain limit. Unlike a traditional loan, you don’t receive a lump sum upfront. Instead, you can draw funds as needed and only pay interest on the amount you borrow.
Here’s how it works:
- Draw Funds as Needed: You can withdraw money when necessary, up to a set limit.
- Revolving Credit: As you repay what you borrow, the credit becomes available again, similar to a credit card.
- Interest on What You Borrow: You only pay interest on the amount you use, not the full credit limit.
A company credit line is ideal for managing cash flow, covering short-term expenses, or handling emergencies. It provides financial flexibility, especially for businesses with seasonal sales fluctuations or delayed payments from clients.
Types of Company Credit Lines
There are several types of company credit lines, each suited to specific business needs. Here’s a breakdown of the most common types:
Secured Line of Credit
A secured line of credit requires you to provide collateral, such as inventory, equipment, or accounts receivable. Because the lender has security in the form of assets, interest rates are generally lower, and approval is easier. However, if you default on the loan, the lender can seize your collateral.
Unsecured Line of Credit
Unlike secured credit lines, unsecured lines of credit don’t require collateral. Instead, approval is based on your business credit score, revenue, and overall financial health. While this makes unsecured credit lines more accessible, they often have higher interest rates and stricter qualification criteria.
Revolving Line of Credit
A revolving line of credit allows you to borrow, repay, and re-borrow funds as needed. This type of credit functions like a business credit card, except it typically comes with lower interest rates. Revolving credit lines are useful for managing unpredictable expenses or fluctuating cash flow.
Short-Term Line of Credit
Short-term credit lines are designed to meet immediate cash flow needs. They often have higher interest rates and shorter repayment terms (usually 12 months or less). Businesses use short-term credit lines to cover urgent expenses, such as purchasing supplies or handling emergency repairs.
SBA Line of Credit
The Small Business Administration (SBA) offers lines of credit through its CAPLines program. This program supports small businesses that need working capital to cover seasonal expenses, construction costs, or contract-related expenses. SBA-backed credit lines have lower interest rates and longer repayment terms but require more paperwork and a lengthy approval process.
Benefits of a Company Credit Line
Access to a business line of credit can provide numerous advantages for your company. Here are some of the key benefits:
Flexible Access to Funds
Unlike traditional loans, you only borrow money when you need it. This allows you to manage short-term expenses and handle cash flow fluctuations.
Pay Interest Only on What You Use
You only pay interest on the funds you withdraw, not the entire credit limit. This can significantly reduce borrowing costs compared to fixed-term loans.
Revolving Credit
As you repay borrowed funds, the credit becomes available again. This ongoing access to cash can help with repeat expenses like payroll, inventory purchases, or equipment repairs.
No Collateral (For Unsecured Lines)
Unsecured credit lines don’t require collateral, so you won’t have to risk your business assets or personal property.
Build Business Credit
Using and repaying a company credit line responsibly can improve your business credit score, making it easier to secure larger loans or better financing options in the future.
Drawbacks of a Company Credit Line
While company credit lines are incredibly useful, they also come with potential downsides:
Higher Interest Rates
Unsecured credit lines have higher interest rates than secured lines of credit or traditional loans. The rates can range from 7% to 25%, depending on your credit profile.
Annual Fees and Maintenance Costs
Some lenders charge annual fees, origination fees, or maintenance fees for keeping the credit line open. These fees can add up over time, even if you don’t use the credit.
Variable Interest Rates
Many business credit lines have variable rates, meaning your interest costs can increase if interest rates rise. This makes it harder to predict your monthly expenses.
Risk of Overuse
Since credit is always available, it’s easy to overborrow. Businesses that consistently rely on a credit line may struggle to repay it.
Strict Qualification Requirements
Unsecured lines of credit have stricter requirements, such as strong business credit, high revenue, and a solid operating history. Startups and small businesses with poor credit may have difficulty qualifying.
How to Qualify for a Company Credit Line
To qualify for a business line of credit, you’ll need to meet certain financial criteria. While exact requirements vary by lender, here are some of the most important factors:
Business Credit Score
Lenders assess your business credit score to determine your creditworthiness. A score of 680 or higher improves your chances of approval for unsecured credit lines.
Time in Business
Lenders prefer businesses with at least 6 months to 2 years of operational history. New startups may find it difficult to qualify for unsecured lines of credit.
Revenue and Cash Flow
Lenders want to see consistent cash flow and strong revenue. They’ll review your bank statements and financial reports to ensure you can repay borrowed funds.
Collateral (For Secured Lines)
If you’re applying for a secured line of credit, you’ll need to provide collateral, such as accounts receivable, inventory, or equipment.
Personal Guarantee
Many lenders require a personal guarantee, especially for small businesses or startups. This means you’re personally responsible for the debt if your business can’t repay it.
How to Apply for a Company Credit Line
Applying for a business line of credit requires preparation and documentation. Here’s a step-by-step process to get approved:
Research Lenders
Compare online lenders, traditional banks, and credit unions. Each has different fees, rates, and requirements. Online lenders tend to have faster approvals, but banks may offer lower interest rates.
Gather Required Documents
Be prepared to submit the following:
- Business tax returns
- Bank statements (6-12 months)
- Profit and loss statements (P&L)
- Balance sheets
- Personal and business credit scores
Complete the Application
Submit your application online, in person, or through a business banker. Include all required financial documents to avoid delays.
Wait for Approval
The review process can take a few days (for online lenders) or a few weeks (for banks). Lenders will assess your creditworthiness, cash flow, and risk profile.
Accept Terms and Conditions
Once approved, review the terms, including interest rates, fees, and repayment conditions. If everything looks good, sign the agreement.
Access Your Credit Line
After acceptance, you’ll have access to your line of credit. You can draw funds as needed, and you’ll only pay interest on what you borrow.
How Much Does a Business Line of Credit Cost?
The cost of a company credit line depends on the type, lender, and your creditworthiness. Here are common costs to expect:
Interest Rates
Rates range from 7% to 25%, with lower rates available to businesses with strong credit.
Annual Fees
Lenders may charge an annual fee, typically $50 to $250, to maintain access to the credit line.
Origination Fees
Some lenders charge an origination fee of 1% to 3% of the credit limit.
Draw Fees
Each time you withdraw funds, you may pay a draw fee of 1% to 3% of the amount.
Late Payment Fees
If you miss a payment, you may face late fees and penalties.
Frequently Asked Questions
What’s the difference between a business line of credit and a business loan?
A business loan provides a lump sum with fixed payments, while a line of credit allows you to borrow as needed and only pay interest on what you use.
Can a startup get a business line of credit?
Startups may qualify for a secured credit line or use a personal guarantee to access unsecured options.
How fast can I get a business line of credit?
Online lenders offer same-day or next-day approvals, while banks may take several weeks.