Key insights:
- A business line of credit provides a flexible funding source, with interest only on the amount you borrow
- The available funds replenish as you make payments, so you can draw from the line once or multiple times as needed
- Lenders evaluate your creditworthiness, annual revenue and time in business during the application process
- Citi offers business credit solutions designed to help you manage everyday expenses and cash flow
Maintaining steady cash flow is a major priority for business owners. It’s important to have funds readily available to cover the necessities, such as operational costs and employee pay, in case revenue slows or unexpected expenses arise. Flexible financing, such as a business line of credit, can help bridge cash flow gaps and give you peace of mind during slower months.
Let’s explore what a business line of credit is, how it works and the steps to acquire one for your business.
What is a business line of credit?
A business line of credit is a flexible borrowing tool that allows a business to access funds up to a set limit. Similar to a business credit card, a lender approves you for a maximum amount from which you can draw whenever the need arises.
There are many scenarios where a small business owner could benefit from a business line of credit. A retail store owner might need extra capital to stock up on inventory ahead of the busy holiday shopping season. A landscaping company could use the funds to repair broken equipment without disrupting its daily cash flow. In these situations, a business line of credit provides quick access to funding for both planned and unplanned expenses.
How does a business line of credit work?
A business line of credit functions as a revolving account. Your available credit replenishes as you pay down your balance. For example, if a lender approves your business for a $50,000 line of credit and you borrow $10,000, you will have $40,000 left to withdraw. Once you repay that $10,000, your available credit goes back up to $50,000.
This revolving nature is different from that of a traditional installment loan. With a traditional loan, you receive a lump sum of money all at once and pay interest on the entire amount. With a business line of credit, you only pay interest on the money you borrow.
What are the requirements to get a business line of credit?
Common lender requirements for a business line of credit include a strong history of creditworthiness, consistent annual revenue and at least 1 or 2 years in business.
If you apply for a secured line of credit, you’re required to pledge business assets, such as equipment or inventory, to back the borrowed amount. Unsecured lines of credit do not require collateral, but they might come with stricter creditworthiness requirements.
What are the pros and cons of a business line of credit?
While getting a line of credit for a business comes with several notable advantages, there are also a few potential drawbacks to consider before you apply.
Benefits
- You have flexible access to capital for ongoing projects and everyday expenses
- You only pay interest on the portion of the credit line you actually use
- You can reuse funds as you pay down your balance
- You may build your business credit over time and a relationship with a lender
Considerations
- You may receive a lower borrowing limit than you would with a traditional loan
- Your creditworthiness could be negatively impacted if you don’t use the line of credit responsibly
- Your interest rate may be variable, meaning it can fluctuate over time
As a small business owner, weighing these factors against your specific financial goals and operational needs can help you decide whether a line of credit is right for you.
How to apply for a business line of credit in 4 steps
If you decide that a revolving credit line makes sense for your business goals, here are 4 common actionable steps to apply for one.
Review your credit profile
Check your business and personal creditworthiness. Lenders will review this information to gauge your ability to manage debt.
Prepare the necessary documents
Gather essential paperwork before you apply. You will typically need bank statements, recent tax returns, business licenses and financial statements. If you apply for a secured line of credit, you must also provide proof of business collateral.
Compare lenders and terms
Compare different lenders to find terms that align with your business revenue and funding needs. Examine credit limits, interest rates and reporting practices across banks and credit unions.
Complete an application and wait for a decision
After you submit an application, the lender will review your overall creditworthiness and business financials to make a final decision. Approval times vary by institution.
Explore business lines of credit with Citi
A business line of credit can be a valuable tool for managing cash flow and funding ongoing operations. It gives you the freedom to borrow only what you need and draw funds again as you repay your balance. Taking the time to evaluate your upcoming expenses and seasonal cash flow gaps can help determine if a revolving credit line makes sense for your current business needs.
Ready to take the next step? Explore Citi's business lending options today to find a flexible financing solution that supports your goals.
Business line of credit FAQs
Can an LLC get a business line of credit?
Yes, a limited liability company (LLC) could get a business line of credit. Lenders will typically require the LLC to provide business financial statements, tax returns and proof of consistent revenue. The lender may also ask the business owners for collateral as security for the line of credit.
Is it hard to get approved for a business line of credit?
Approval depends on your business’s financial history and creditworthiness. Businesses with consistent revenue and a strong history of managing debt may find the process straightforward. Newer businesses or those with limited revenue might face a stricter review process.
How long do you have to pay back a business line of credit?
Repayment rules vary by lender and the terms of your agreement. You should always review your contract to understand the exact payment schedule.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.