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Business Credit, Finance & Accounting

What is a Line of Credit and How Can I Get One?

What is a Line of Credit

Post Updated – August 23rd, 2017

A Line of Credit (LOC) is an amount of credit extended to a borrower.  Getting a business line of credit is an important way for business owners to get access to an ongoing source of funds to help manage cash flow, pay bills and otherwise maintain the daily operations of their company.

There are a few differences between a line of credit, a credit card and a business loan, and it’s important to understand your options – and know why you want to use a line of credit – before you sign up to get a line of credit. First, keep in mind that a business line of credit is a business loan that is intended to help small businesses meet their short-term cash needs. This includes purchasing supplies or additional inventory or covering operating expenses. Essentially, a business line of credit helps small businesses grow by giving them an ongoing source of funds to tap into when needed.

One of the most common uses for a business line of credit is to help maintain cash flow. At some point, all businesses will experience some degree of cash flow problems. There are unexpected circumstances that arise that can put even the strongest of small businesses into a cash flow crunch, such as customers who are slow to pay their bills, a sudden drop in sales, a recent influx of new employees (which means additional payroll) or unexpected expenses. Whatever the reason, it’s normal for businesses to occasionally have urgent short-term needs for additional cash, especially during uncertain economic times like we have seen in the U.S. during the past decade.

A revolving line of credit is a “revolving” credit account, which means you can borrow from the credit account and add to your balance (within a certain limit) as often as you need it. After borrowing from your line of credit, just like with a credit card, you are required to make monthly payments to repay your outstanding balance, and you can borrow more money as long as you are within your credit limit. What makes business lines of credit more appealing to small businesses are that unlike credit cards, the interest rate is typically slightly higher than the prime lending rate – so this means that a business line of credit is typically “cheaper money” than a credit card.

  • TIP: Although it might often seem easier to use small business credit cards to cover cash flow shortfalls and offset business expenses, think twice before you reach for the plastic, especially if you cannot pay off your balance in full each month. Credit cards tend to have significantly higher interest rates that will leave you paying more in the long run.
  • TIP: To avoid having to run up a balance on your business line of credit, add to your business savings whenever possible. By building a financial nest egg, you’ll be less vulnerable to cash flow shortfalls and will reduce your need to borrow.

Business Line of Credit vs. Loan

Many business owners want to know the differences between a business line of credit and a traditional business loan. The distinctions are subtle, but each one offers certain advantages, and it’s important to take these into consideration when deciding which financing option is best for your business.

One difference is the interest rates you’ll be charged for each. The rates for a business loan are generally a fixed interest rate, and the interest rate you are assigned for your business loan is dependent on your credit score and risk levels. For a business line of credit, the interest rate is usually tied to the market’s variable rate.

Another difference between a business line of credit and a business loan is how your payments are structured. A business loan is very similar to a traditional loan such as an auto loan, where you have a set amount that is due each month until the loan is paid off entirely. With a business line of credit, the amount you are expected to pay back each month depends on how much of the line of credit was used during the last month. So instead of making a fixed monthly payment like a business loan, with a line of credit, your payment will vary from month to month.

Reasons to Get a Business Line of Credit

There are many reasons why your business may require the assistance of a business line of credit. Once approved, you can access the funds for a variety of business needs, such as paying for unexpected expenses or repairing or replacing computers, cash registers, office supplies or other equipment. A business line of credit funds can also help sustain a current marketing plan or begin a new marketing campaign. You can use the funds to expand or remodel your current business location or storefront. And you can use the funds to purchase additional inventory to prepare for when your sales pick up again. These are just a few of the many ways you can use the funds from a business line of credit to grow your business.

A business line of credit is also a good option to offset the “peaks and valleys” of some businesses – particularly those that operate seasonally, such as a seasonal retail store, tourist destination or an ice cream shop that does most of its business during the summer months. To offset the lack of steady revenue during the slow time of year, seasonal businesses like these can take advantage of a business line of credit during their off-season. The line of credit will give them access to funds that will allow them to continue to pay their bills on time. And it will give them credit to purchase additional inventory if needed, so they can be ready when their busy season begins again. Coming full circle, when their season begins again and sales are strong, they will be in a better position to begin paying back the business line of credit along with any interest and fees.

How to Get a Line of Credit

There are a few things you need to have in place before applying for a business line of credit. Here are the top six tips to get a line of credit:

  1. Build good credit history from the very beginning of your business.When most small businesses get started, it’s often a challenge to maintain positive cash flow. Even if you are making lots of money with your product or service, most of that money often is going right out the door to pay for operational expenses, inventory, payroll and general business upkeep. This makes it important to build a good credit history for your business. Set up a business bank account (under your company’s name), pay your bills on time and establish phone lines and utility bills in your business’ name as well. These things will help you build good credit and make your business more favorable in the eyes of potential lenders.
  2. Do your research.Check out a few different banks or lenders online to find out their loan terms and compare interest rates. You might be able to get a good deal on a line of credit from your current bank. And if your credit is less than stellar, consider platform lenders such as Kabbage, who often make it easier for business owners to get approved for financing even if they have less than perfect credit or have not been in business for very long.
  3. Demonstrate a positive cash flow.In order to get an unsecured line of credit, your business must be able to demonstrate positive cash flow. Your entire business performance will be under review. In addition to your credit history, lenders will consider your past, present and projected future earnings to determine if you qualify for a business line of credit and if so, how much you will receive and at what interest rate. After all, no bank or lender will want to give you a business line of credit unless they are confident in your ability to repay the money that you borrow.

*Note: some lenders will offer a “secured line of credit” – a line of credit backed by collateral – for businesses with poor credit. Getting a secured line of credit is a bit riskier for the borrower, because it requires you to risk surrendering an asset like a car or real estate property in case the loan is not repaid, but this may be a good alternative and a way to rebuild your credit as long as you keep up with on-time payments. Most business lines of credit are unsecured lines of credit, which means you do not need to provide any kind of significant collateral to qualify. This can be very reassuring to homeowners and property owners to know that they are not in jeopardy of losing their home if they cannot make their payments.

  1. Don’t max out your personal or business credit cards.As tempting as it may be to use your credit cards for business expenses, be careful! For one thing, maxed out credit cards do not look good to potential lenders – they will hurt your credit score, reduce your ability to get approved for loans, and raise your cost of borrowing. And second, consider the extraordinarily high rate of interest you’ll be paying on the credit cards. Most of the time, for most business owners, a business line of credit will offer a more reasonable interest rate than any credit card.
  2. Start small.Remember when you were just starting out in the world as a young adult and you got your first credit card? If your parents taught you well, they taught you to make small purchases and pay the balance off each month. This way, you’re not paying interest, you’re not overextending yourself and you’re building a good credit history by sticking with consistent, on-time payments. The same is true for a business line of credit. If your credit isn’t great, start small and take whatever line of credit the lender is willing to give you, even if it’s smaller than what you actually need. Make your payments on time, or better yet – early. As you gradually begin to build your credit history in a more positive direction, you can ask for a larger line of credit.
  3. Apply when you don’t really need the money.The best time to get a business line of credit is when you don’t really need one. Sounds silly, right? But it’s true. Banks are generally more than willing to loan you money when your cash flow is strong and your numbers are great and you’re not in desperate need of a loan. When your cash flow is very positive and your sales are strong, you might not think you need a business line of credit. But in fact, this is one of the best times to apply for a small line of credit, because you’re in strong position to pay it back immediately and it will help you establish good credit with your lender. And that will help you, in the long run, should you ever need to take advantage of a bigger business line of credit.
  • BONUS TIP: Don’t overextend yourself. Too many credit cards that are at or near the maximum limit show that you may be in over your head – “credit utilization” is an important aspect of your credit score, so if you are borrowing nearly all of your available credit limit, banks will be reluctant to offer you more money.

A business line of credit is a good solution for businesses for a variety of ongoing business needs and cash flow fluctuations. However, if your credit is poor or bad, you may not qualify for a traditional business line of credit.

In that case, you may want to consider platform lenders such as Kabbage, who can provide lines of credit to small or online businesses with poor or bad credit. The platform lending application process is usually simple and takes place on a secure online site rather than in a traditional brick-and-mortar lending institution. This offers the merchant more privacy and a convenient way to apply for a line of credit.

Most platform lenders offer a quick turnaround time as well, so there is a very little waiting period to get your money. The requirements are generally the same for a platform lender as for a traditional bank lender – with the noted exception of good credit. Platform lenders are also typically more flexible about assessing your business’ creditworthiness by looking at online sales receipts and social media followers, etc. – it’s a great solution to get credit for online business models that traditional banks might not fully understand.

With a platform lender, such as Kabbage, your business line of credit can be processed in a matter of minutes. It’s all done online and when you’re approved, the funds are transferred to your account directly. Signing up for Kabbage is free, with no application fees, and there are no costs until you accept the money. And for your personal privacy and security, Kabbage also uses the highest levels of encryption.

So how much cash should you request? According to the New York Times, many financial experts suggest that a company plan to use 75-80 percent of its credit line to cover typical operating expenses, with the remainder available for contingency purposes. Keep in mind the amount that you would need to sustain day-to-day operations as well as your ability to repay the loan as you make your decision about how large of a line of credit to request.

The most important thing to remember when it comes to business lines of credit is to do your homework. Have your financial statements in order. Know what you can afford, and do not overextend yourself. A business line of credit is meant to offer a helping hand to a solid business with a proven ability to repay the loan – not as a limitless supply of “free money.” If you are having trouble repaying your line of credit on a month-to-month basis, that is a sign that you might need to cut expenses or rethink your business model.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at