When running a business, owners often reach the point in which funding is needed to grow. They may recognize the need to invest in hiring new employees, purchasing inventory in bulk or upgrading equipment, but they lack the capital to do it.
The National Business Association reported 27% of U.S. small firms couldn’t access financing in 2015. It found that when capital financing is not available, 31% business owners can’t grow or expand business operations, 18% can’t finance increased sales, 14% reduced their employees and 10% were unable to increase inventory to meet demands.
At that stage, they need an injection of funds to support their growth and take their business to the next level. A business line of credit can offer the solution. It’s a type of business loan with a unique structure that can be helpful for budding businesses. The good news is that online lenders are now offering this financial product, increasing the accessibility to business owners.
How does it work?
A business line of credit is an amount of money extended to a borrower for business purposes, often unsecured. Similar to a business credit card, once you get approved for a line of credit, it is available and you can use any portion of it at any time. When money is withdrawn from the line, you are required to pay it back according to the repayment terms, with applied interest.
Benefits of a business line of credit
Retain control of your company
A business line of credit enables you to grow your business without interference from a third party that might want to buy a stake in your company. You can make decisions regarding your company’s spending and typically don’t have to report to the lender about them.
Get funds when you need them
You can withdraw a large or small amount of your business line of credit, and you pay interest only on the amount withdrawn. Compare this with a business loan, in which you are given the entire amount and have to make regular monthly payments with interest, even if you’re not using all of it.
Build business credit
Many businesses struggle to build credit for their company. Business line of credit lenders often report to the credit bureaus. If you make your payments on time, you steadily establish a positive credit profile.
Where to find the best offers
In recent years, access to business lines of credit and loans has expanded. Now you don’t have to rely on your bank or credit union but can turn to a range of online lenders. According to Morgan Stanley’s Global Marketplace Lending paper, marketplace lending accounted for 1% of unsecured consumer and SME lending in 2015. However, lending growth doubled every year from 2010-14, and the paper predicted that by 2020, marketplace lending’s share would increase to 10%.
The growth in available lenders has increased the competition in the market, which means better loan terms for business owners. When considering lenders, look at their reputation, interest rates, approval requirements, maximum loan amount, repayment period and other fees. Here are our top picks.
OnDeck is the largest U.S. online small-business lender. It was established in 2007 with the goal to make capital more accessible for small businesses. It has issued more than $6 billion in loans to more than 50,000 businesses. The online application process is easy and a decision is made in minutes based on your personal credit and business performance.
- Approval requirements:
- Credit score minimum: 500; average credit score of borrowers is 660 and above.
- Business in operation: One-year minimum; median number of years in operation for borrowers is seven.
- Business revenue minimum: $100,000 per year; typical borrowers have $450,000 in annual income.
- Maximum loan amount: $100,000.
- APR: 13.99% to 39.9%; average rate reported is 29.99%.
- Repayment period: Six months.
- Fees: Monthly maintenance fee of $20, waived if initial draw is $5,000 or more.
Kabbage is another leading online lender, with a philosophy that business funding should be convenient and simple. Founded in 2009, it has provided more than $3 billion in loans to more than 100,000 businesses. You can apply online, get a decision in minutes and get the funds as soon as the same day. Upon approval, you are offered a credit line that can be managed through its mobile app. You can make withdrawals up to once per day.
- Approval requirements:
- Credit score minimum: Not specified but credit is checked.
- Business in operation: One-year minimum.
- Business revenue minimum: $50,000 per year or $4,200 each month for the last three months.
- Maximum loan amount: $100,000.
- APR: 32% to 108%.
- Repayment period: Six or 12 months (a $15,000 loan is required for 12-month term).
- Fees: None.
How to qualify
Qualifying for a business line of credit varies from one lender to the next, but most will look at how long you’ve been in business, how much annual revenue you earn and your personal credit. Some also may look at your business assets to provide you with a secured loan. You can typically apply online within minutes by visiting the company’s website and submitting the required information.
Before committing to a lender, be sure to shop around so you can compare a few companies. Keep Ondeck and Kabbage in mind while looking at other options on our business loan review page. You’ll find each company’s terms and reviews from other business owners who have borrowed from the lenders.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.