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How to Find the Best Small Business Line of Credit

When your business experiences growth or encounters issues with uneven cash flow, easy access to cash can be the only way to keep your head above water. That’s why establishing a small business line of credit can be an excellent option for short-term financing.

But while a line of credit can be beneficial for many businesses, it’s not always clear which lender represents the best option. Find out everything you need to know about getting a line of credit for small business start-ups, right here.

What is a business line of credit?

A business line of credit is a type of loan that differs significantly from term loans, which provide a one-time lump sum that you need to repay over a given period, or term.

By contrast, you can keep reusing and repaying a business line of credit as often as you want, so long as you don’t exceed your credit limit or stop making payments on time. Business lines of credit tend to be unsecured – meaning that you don’t need to offer inventory or real estate as collateral – and borrowing limits are often smaller than term loans.

In a sense, a line of credit is much more like a credit card than a standard loan. They’re great for unexpected purchases or operational expenses, while they can also be an excellent source of working capital for cyclical or seasonal businesses to use in the off-season.

Remember, a line of credit for small business start-ups should always be used as a safety net, rather than a tool for everyday use or long-term borrowing.

How to choose the best small business line of credit

When determining the best bank for a small business line of credit, there are many different factors that are likely to play into your decision, including the minimum requirements detailed by lenders. Criteria you'll have to consider include:

  • Time in business - Some lenders will require your business to have been operating for longer than other lenders will. If you haven't been in business long, this will be an important factor for you.

  • Revenue - Different lenders will have different requirements for how much revenue your business generates, before offering you a line of credit.

  • Credit score - Your credit score will also often be used as a requirement for lending, with different lenders setting different minimum requirements here.

  • Speed of funding - How soon do you need the cash? If your expenses are urgent, this will be a critical factor in deciding which lender to establish a line of credit with.

  • Funding amount - How much cash do you need? If your expenses aren't large, you can settle for a smaller line of credit, which will likely dictate less strict lending requirements and more favourable repayment for you.

  • Repayment terms - How often will you need to make repayments? And when will the lender require the full amount of the line of credit be repaid? Consider this carefully when deciding which lender to go with.

  • Rates - Arguably the most crucial factor when considering your line of credit is how much it will cost you. That is, accounting for the interest rate and any additional fees that you will need to pay back on top of the amount borrowed.

By assessing each of these factors, by looking at both your business needs and what different lenders can offer you, you'll be in a good position to select the best line of credit for your small business.

How to apply for a small business line of credit

Getting a line of credit is simple – it’s essentially the same as any other loan. You’ll make an online application, and based on the information provided, the lender will determine whether your application is approved. You’ll need to provide basic details of your business – such as company type and address – as well as financial details like bank statements and VAT returns. There’s usually no waiting around for a decision, as you’ll receive a notification on the same day.

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Disclaimer

This guide is for your general information and use and is not intended to address your particular financial requirements. In particular, the information does not constitute any form of advice or recommendation by GoCardless Ltd and is not intended to be relied upon by users in making (or refraining from making) any financial decisions. The guide solely represents the thoughts of the author based on their experience of the complex payments regulatory landscape on which the GoCardless platform and services are based. Appropriate independent advice should be obtained before making any important financial decision.

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