Regardless of a business’s size, there are many instances when it needs financing to grow. Small business owners have many choices ranging from personal loans, merchant cash advances, equipment financing, invoice factoring, and even accounts receivable financing. However, it can be daunting to consider all of these options, but a business line of credit (or LOC) could be a prudent choice.
A business line of credit is similar to a credit card, meaning that the financing company gives the small business owner a specific amount, called a credit limit that they can use at any time.
The business owner would only pay the principal and interest based on the amount he or she withdrew from the credit limit. This factor makes a LOC more flexible and not as risky than traditional lump sum or term business loans.
Check out our guide on the Small Business Loans
Business Line Of Credit (LOC) Vs. Loans
A business line of credit is similar to a credit card or Home Equity Line of Credit as both accounts give the borrower a specific limit that he or she has access to at all times. However, the borrower only has to pay back only the amounts he or she took from the account with interest. Due to this, LOCs typically have lower closing costs and interest rates. These are some of the advantages a LOC has over a standard business loan.
Here are some other LOC features like:
- Being secured or unsecured. This simply means that this financing can be backed by the borrower’s word (unsecured) or a business asset like equipment, Accounts Receivable or inventory (secured). Since secured loans are backed by business assets, they have more favorable terms, as the lender can repossess these assets in case of default.
- Can be revolving. Revolving lines of credit allow small business owners to spend up to the limit and constantly borrow the same dollar figure once it has been paid back. Once this balance is repaid, the business owner can constantly borrow up to this amount indefinitely. This feature makes obtaining working capital much quicker to achieve compared to a traditional loan.
- Variable interest rates. This is one of the main drawbacks of this financing type. Standard term loans have fixed rates, while LOC rates can vary. Fortunately, these rates can stay relatively constant if the business owner is current with his or her payments. However, one missed payment can drastically increase the business owner’s interest rate.
These features make this business credit financing unique compared to other options, but there are some common mistakes to avoid, which are discussed in the next section.
Common mistakes to avoid
Business lines of credit can be a great way to obtain flexible financing, but there are some common mistakes to avoid. A small business owner that avoids these common mistakes will be able to use this financing method without any unnecessary repercussions.
The most common LOC mistakes to avoid are:
- Using them for long term financing. Traditional loans are better for long term financing as they have lower rates and more predictable terms. One missed payment won’t substantially increase the interest rate and lenders are more accommodating to borrowers with standard loans. So, term loans could be a better choice for businesses that have longer-term goals like expanding to new areas or purchasing important equipment like assembly belts.
- Rushing through the application process. A LOC can be optimal for those that need cash flow in a pinch, like needing to cover employee payroll for a month. Yet, this rushed process will cause business owners to not carefully examine the fine print of each contract. Unfortunately, some lenders include hidden fees, hefty interest rate spikes and other unfavorable terms that business owners fail to recognize.
- Only applying for funding in desperate situations. Like the above point, this mistake would cause the business owners to not recognize important contract terms. Also, lenders are more likely to give favorable terms to businesses that are cash flow positive and have been around for several years. Business owners that plan ahead and get approved for this arrangement will be more prepared than those that scrambled at the last minute.
Also, some business owners make simple mistakes on the application like incorrectly inputting EINs, contact info and credit history. Therefore, it’s prudent to spend at least an hour thoroughly examining the application to prevent unnecessary errors.
What to look for in a provider
When choosing this type of financing, it’s imperative to work with the correct provider. It’s important to evaluate terms like APR, repayment length, funding time, customer service and positive reviews. Small business owners should look for lenders that have transparent terms and speedy customer service, which will help solve their problems efficiently. They should also consider the minimum credit score standards per provider and if they need to secure the loan with a business’s asset(s).
Also, it’s wise to consider loan limits and if the financing is revolving, which allows the business owner to have access to the same limit after repayment. Related to this, business owners should carefully examine the rules regarding missed payments and if they need to show documentation after repayment. For example, some lenders require business owners to show important business records like tax returns, balance sheets, and income statements prior to asking for a higher credit limit or additional withdrawals after repaying the original balance.
Usually, these documents are required if the business is relatively new or has had trouble paying the loan in the past. Conversely, businesses that are more established and stay on top of payments can typically obtain higher limits along with new funding without additional paperwork.
Unique LOC perks
In addition, some lenders also have rewards systems which give business owners who pay on time perks like points that can be used for additional purchases like travel or merchandise. For instance, Wells Fargo has a lucrative rewards system for its unsecured LOC that gives business owners 1,000 bonus points every monthly billing period they incur $1,000 or more in net purchases. Business owners can also be entitled to a 10% bonus of the redemption value if they redeem online. Also, some lenders give borrowers access to a business credit card, which makes it more convenient to access funds.
Work with ethical lenders
Sadly, the business lending industry doesn’t have the best reputation as it’s full of fly by night firms that just want to exploit business owners for a quick buck. These unethical lenders have complex contracts or trick business owners with too good to be true terms. This is commonly known as “bait and switch”, meaning a lender offers favorable terms only to change them once the contract has been signed.
While it’s great to work with a lender that offers quick funding, business owners shouldn’t feel rushed into signing the dotted line. Some business lenders use pushy sales tactics like cold calling and excessive urgency to get signed contracts. It’s wise to slow down and meticulously review the terms. Lastly, business owners should work with lenders that have accessible, and knowledgeable customer service agents that can answer their questions. Also, these customer service reps should focus on service, not upselling business owners with unnecessary products.
Best providers in 2022
These top 5 providers have been carefully selected due to their efficiency, unique features, and positive customer service reviews.
BlueVine is similar to StreetShares as it has the same three core offerings which are LOCs, term loans, and invoice factoring. Small business owners can obtain loans and credit lines up to $250,000 and finance up to $5,000,000 worth of unpaid invoices. It strives for transparency by having no hidden fees, origination fees, prepayment penalties nor long term contracts.
Like other providers mentioned in this guide, it offers online application processes that determine if a borrower is approved in just 10 minutes. It also emphasizes efficiency by cutting down on paperwork and providing borrowers with custom loan software. This personal loan portal allows business owners to pinpoint what they owe and track their payment progress.
This lender can be seen as a middle ground between the others has it doesn’t have very high requirements nor doesn’t focus on borrowers that have bad credit. Its minimum requirements are a 600 FICO score, $100,000 in annual revenue and at least 6 months of business history. Since it has relatively high credit limits, businesses of all sizes could benefit from their offerings.
BlueVine’s honest fee structure is very helpful as other competitors can have complex fee arrangements and even hide charges in the contract. However, its rates can fluctuate from as low as 4.8% up to 88% for term loans. The LOC and invoice factoring packages have max APRs at 78% and 68% respectively, which make it pricier than some lower-cost small business loan providers.
Also, Bluevine has different repayment periods based on the loan term. For example, term loans require weekly repayments, while a LOC can be repaid monthly. Its short loan terms can be helpful for small business owners that are tight on cash, but this increases the monthly payment. Also, these high payments along with the frequent weekly repayment schedule can be difficult for businesses that have volatile cash flow.
This lender is very tech-savvy and also lets business owners integrate their tax/payroll software during the application. By doing this, they can expedite the approval process and this can even qualify borrowers for a higher credit limit. This feature is also very useful for borrowers that need invoice factoring as BlueVine will easily identify the unpaid invoices.
Like other providers, BlueVine has certain standards and can’t offer LOCs in states like North Dakota, South Dakota, or Vermont. It also won’t approve business owners that operate in restricted industries like gambling, medical marijuana, or pornography.
BlueVine has US-based customer service representatives that can be accessed by email or by phone from 8 am to 8 pm EST during the week and 12 pm to 4 pm EST on Saturday. It also has an informative FAQ section that educates viewers on loan products, definitions, and the company itself.
It has also received funding from prominent financial firms like Nationwide, Menlo, Citi Bank and others, which gives it more credibility. Its Trustpilot rating is an impressive 9.4/10, which is based on over 1,100 reviews. Many of the positive reviews mention that specific customer service reps took extra time to explain loan details and have sent multiple follow up notes. It has also been praised for it’s quick turnaround time along with the transparent terms.
However, it has received a few negative reviews, with one recounting a business owner having his or her approval rescinded due to the application being filled out incorrectly. More importantly, BlueVine has responded to most negative reviews with proposed solutions to fix those reviewers’ problems.
Like Fundbox, StreetShares is another online lender that provides LOCs and Invoice Financing to younger businesses. It differs from Fundbox as it offers other lending products like term loans, veteran business bonds, and standard small business loans. Also, this company primarily focuses on veterans and has partnered with organizations that cater to veterans like the Armed Forces Financial Network, and the National Veteran-Owned Business Association. In fact, StreetShares CEO Mark Rockefeller, started this company after seeing payday lenders near military bases exploit his fellow veterans. He wanted to establish a company that would provide clear, transparent funding to military veterans and their families.
It’s also unique as it allows the public to invest in veteran business bonds. Similar to peer to peer (P2P) lending, the general public can purchase these bonds which fund veteran-owned businesses. Per its website, investors can expect returns up to 5% a year and the funds don’t go directly to the small business owners. Instead, it goes to a pool of funds that StreetShares lend to qualified veteran-owned small business owners.
It’s three products are term loans, invoice financing, and LOCs, with APRs ranging from 8 to 40%. Also, invoice financing has lower APRs from 1 to 5%. These interest rates are relatively low because this company has higher approval standards than others. For example, it requires that businesses have been in operation for at least one year with a minimum annual revenue of $75,000. Another byproduct of this is that StreetShares offers higher loan amounts which are $250,000 for term loans and LOCs. The repayment terms range from 3 to 36 months and it demands that business owners have credit scores of at least 540.
Besides the principal three loan products, it offers similar terms and rates for asset-backed loans, payroll lines of credit, Accounts Receivable lines of credit, and government contracting financing. These loans have many commonalities, but asset-backed loans are secured with collateral like equipment, which usually leads to lower fees and rates. Payroll lines of credit are specifically used to front business owners’ funds to cover their employee payroll during low revenue months.
It also doesn’t have prepayment fees, which makes it easier for borrowers to save money by paying the loan earlier. Due to this and it’s somewhat low revenue requirements, StreetShares is a useful platform for new businesses. Like Fundbox, StreetShares is a technically savvy firm since it uses software like DocuSign and Quickbooks to expedite the approval process. Docusign is online software that enables clients to sign paperwork electronically from anywhere with WiFi access. StreetShares uses Quickbooks to examine a business owner’s financials, which determines if he or she will be eligible for financing.
StreetShares has an 8.1/10 rating on Trustpilot, which includes mostly positive reviews for its customer service. Users have left reviews mentioning that they received funds in as little as two business days and that the friendly customer service representatives were knowledgeable on many loan products. It’s customer service reps can be reached via phone, email and it has comprehensive resources like blogs along with a detailed FAQ. Besides these tools, it offers viewers educational content like social media posts and videos on its social media channels.
Unfortunately, it has received some poor reviews like frequent customer service rep turnover and high minimum limits for LOCs. Some clients complained that they couldn’t work with the same representative they were accustomed to. Also, some poor reviews state that they weren’t informed of minimum LOC withdrawal amounts for their unique business situations.
Fundbox is a newer lender that offers invoice factoring and LOCs exclusively online. It’s great for newer businesses that need cash flow for short term goals. This lender also has relatively low approval standards as it requires businesses to have at least 3 months of business history and $50,000 in revenue. These are the basic requirements for the invoice factoring and LOC packages, which are somewhat minimal compared to larger banks that require income statements and years of tax returns.
Fundbox’s pricing can greatly vary due to the business owner’s credit score. For example, APRs or interest rates range from 10- 80% for invoice factoring and lines of credit. The repayment terms range from 12 to 24 months, with longer repayment terms having lower interest rates. Fortunately, business owners can obtain financing in as little as a day with this lender. Also, Fundbox connects its application process to a business owner’s tax software to identify the invoices to finance. Fundbox has efficient technology that pays business owners the amount of the selected unpaid invoices in one to two days.
Luckily, this firm offers flexibility and allows business owners to prepay loans without paying additional fees. Prepayment can be a great way to lower APR, but be sure to check with a lender prior to doing this. Some lenders tack on additional prepayment fees, which can make this strategy more expensive in the long run. Also, this company has relatively low credit limits which cap out at $100,000. Therefore, a business that has higher financing needs might be better off with traditional banks or lenders that can offer higher limits.
One of Fundbox’s best features is that it doesn’t require new business owners to put collateral like equipment on the line. It also segregates personal credit and business finances, which means a business owner’s personal finances won’t be in jeopardy if their business fails to repay the loan. Also, it doesn’t contact customers with unpaid invoices, which is great for those that want to keep invoice factoring private. Related to invoice financing, Fundbox also requires small business owners that apply for this to have compatible tax software like Quickbooks or Freshbooks and can finance outstanding invoices that are as little as $100.
Many users give Fundbox high rating for ease of use and excellent customer service. Since this is an exclusively online platform, it doesn’t have paperwork and automates many processes. For example, customers can automate repayment and withdrawals online which saves time and money.
Fundbox has a FAQ section that allows clients to solve their problems prior to contacting customer service via email or phone. The FAQ has two main sections, one for troubleshooting intricate problems and the other for general tips, like basic borrower requirements. It also has a 9.7/10 review on Trustpilot, which highlights quick, comprehensive and ethical customer service representatives.
OnDeck is a relatively simple lender as it offers two main products which are just term loans and LOCs. Unlike Fundbox or StreetShares, they primarily cater to more established businesses. Per their website, the minimum borrower requirements are a FICO score of 600, at least one year in operations, and $100,000 in annual revenue. However, the typical client usually has a FICO score of at least 700, annual revenue north of $500,000, and has been in business for 4 years. They are known for their quick online processes which lets a borrower transfer funds to their bank account funds in as little as one day. Also, OnDeck differentiates itself from the competition by providing each borrower with a dedicated loan advisor, who can answer financing questions and make the process more efficient through tailored service.
Fortunately, OnDeck has very transparent pricing which includes AIRs starting at 9.99% for each loan type. Keep in mind that AIR is different from APR as it doesn’t include fees and it’s wise to obtain an APR equivalent. The APR for term loans usually caps out at 60% and LOC’s rates vary from 11 to 63%. Also, these loans are repaid either daily or weekly from 3 to 36 months. This repayment schedule can be good for those that need short term cash, but it can also strain businesses that don’t receive weekly revenue.
OnDeck has a somewhat simple application process which can be broken down into three steps:
- Fill out an application online or by phone. Small business owners need to have their EINs and three months of business bank account statements to obtain financing.
- From there, a representative will call the applicant informing him or her regarding custom approval limits, loan types, and payback terms.
- If the applicant is approved, he or she would complete an online checkout form and funds could be wired the same day via ACH.
While OnDeck can work with most businesses, it has restricted some business categories from financing like adult entertainment, drug dispensaries, firearms dealers, and other controversial industries.
This platform has also received mostly positive reviews for its customer service. In fact, each borrower is paired up with a dedicated loan officer, which makes it more customized to their needs. OnDeck has a Trustpilot rating of 9.7/10 and many reviews discuss working with efficient friendly, and intelligent loan advisors. They also mention that the process was very streamlined and transparent.
In addition to having dedicated loan advisors, OnDeck differentiates itself from the competition by providing access to a loan comparison tool called SMARTBox. This tool makes loan concepts like APR, AIR, Cost of Capital and repayment schedules simple to understand. Like other providers, it has comprehensive blog posts and guides on different types of loans along with related concepts.
Kabbage is another online lender that offers business owners access to only LOCs in as little as 1 to 2 days. The borrower requirements are low as the minimums are annual revenue of $50,000 per year or $4,200/mo. over the last quarter, and being in business for at least one year. More importantly, it approves applicants with poor credit and considers other business details like revenue, business partner background, and industry. These factors make Kabbage a reasonable choice for sole proprietors and online businesses that have little revenue and history.
Kabbage strives for simplicity and offers borrowers a LOC of up to $250K that can be repaid through a 6, 12, or 18-month term. While it has short repayment terms and no prepayment fees, it doesn’t make fiscal sense to prepay as each borrower pays the bulk of the fees within the first two months.
Since Kabbage caters to newer businesses that have short term needs, it has some of the highest rates in the industry. In fact, APRs can range from 24 to 99%, which is higher than the average credit card’s interest rate of approximately 18% in 2020. These high rates can be a deterrent for those that have a more established history and require long term financing needs.
Besides having high APRs, Kabbage also tacks on additional loan fees based on factors like industry, credit score, and revenue. In fact, these fees can range from 1.5 to 10%. If a borrower has a 6 or 12-month loan, these fees would only apply if he or she has an outstanding monthly balance. Those that have the 18-month loan would have the fees accrued when the loan is funded and a fixed portion of the total fee would be paid each month. This fee structure can be confusing and expensive, which is one of Kabbage’s main drawbacks.
While Kabbage can have many expenses, it does assist its applicants through a variety of free tools like loan and ROI (Return On Investment) calculators. Loan calculators let consumers input amounts like fee rate, loan type, withdrawal amount, and prepayment savings that will show them what they will pay on a monthly basis. The ROI calculators have many different scenarios that show the exact ROI dollar amount that would derive from using a business loan or small business line of credit to fund activities like hiring employees, purchasing inventory, investing in marketing and purchasing equipment.
Kabbage has customer support representatives that can be accessed via the phone or email along with a detailed FAQ section. This FAQ section discusses common loan definitions and also highlights important details about the company like basic terms, history, and security.
Despite its high fees, Kabbage has a 9.4/10 rating on Trustpilot and these reviews highlight its quick, efficient process. It also mentions that specific customer service reps were very helpful, friendly, knowledgeable and not too aggressive. Yet it has received poor feedback due to high fees, inflexibility regarding interest rates, and revoking approval from already approved applicants. Other negative reviews have mentioned they would have been better off with credit cards and to only consider this lender if one has a poor credit score or can’t obtain traditional financing.
- Most businesses need access to affordable and transparent financing to grow to the next level. There are many different choices, but a business line of credit can be a great option.
- The small business owner would have more flexibility and the lender would have less risk as compared to traditional loans, provided the borrower is responsible. This is because the small business owner would only need to pay back the amounts withdrawn and not have to pay back a large lump sum over time.
- It’s wise to consider the best features of a business line of credit providers, along with common mistakes to avoid prior to applying for this type of financing arrangement.
Disclaimer: This is not a tax nor business advice, but general education. Consult a tax or financial advisor for formal business advice.