A business line of credit provides a lump sum of funding that you can draw from whenever your business needs funds. Your credit limit could range from as little as $1,000 to as much as $250,000. A business line of credit is typically revolving, which means the full amount would become available again after you repay the amount you withdraw.
You can find business lines of credit from traditional financial institutions, like banks, as well as online business lenders. Online lenders often have more lenient requirements than banks and faster time to funding, though repayment may be quicker and the cost of financing higher.
Each withdrawal you make from your line of credit would come with its own repayment terms. Typically, you’d have between 12 weeks and 24 months to repay the amount that you borrow, plus any interest or fees. Some lenders collect weekly payments, while others offer monthly payment plans. Repayments usually begin right after you make a draw from your credit line. This quick repayment schedule makes business lines of credit well-suited for short-term or immediate expenses.
Unlike small business loans, interest on a business line of credit only applies to the funds you actually use. Interest is incurred when you make a withdrawal from your credit line and is applied to that individual amount. Average interest rates for a business line of credit could be between 8% to 80% APR or more, depending on factors such as your lender, creditworthiness and business performance. An average starting rate for a credit card is around 16%.
A line of credit may come with fees that are added on to the total loan amount, similar to traditional loans. Depending on the lender, it may add maintenance fees, draw fees, or both. Maintenance fees are typically added to sustain an account that may or may not be in use. Draw fees, on the other hand, are charges that could be applied if a borrower draws against the limit. If you make a late payment, you may be charged a late fee as well.