Expected Rates for a Business Line of Credit
A line of credit is a useful tool for managing cash flow. You can buy inventory and pay expenses before revenue comes in, and you can minimize costs by only using what you need. But predicting your borrowing cost is hard. As you’ll see below, interest rates for business lines of credit are anywhere from 5 percent to more than 20 percent. Advertised rates are always low, but your business’ characteristics—as well as the type of lender you use—determine how much you’ll really pay.
Pros and Cons of Business Credit Lines
A line of credit is a pool of money that you can draw from as needed. You’ll get a maximum credit limit, and you can use almost any amount of the credit line up to that limit. Credit lines are revolving loans, so you have the flexibility to repay your debt, leave the account open, and borrow more in the future if the need arises.
Because you can keep a zero loan balance, lines of credit help you minimize interest costs. For example, you might only use the funds to buy extra inventory or hire additional help before a particularly busy holiday season. Repay the loan quickly, and you’ll avoid interest costs during the rest of the year.
The primary risk of this type of loan is the potential for your lender to close or cancel your line at any time. Lenders often reserve the right to reduce your credit limit, and that will cause problems if you’re counting on something that goes away just when you need it.
What Determines Rates?
Several factors affect interest rates on business lines of credit:
- Your credit history: Lenders want to see a solid history of borrowing and repaying loans. For most small business owners and new businesses, lenders use an owner’s personal credit scores and require a personal guarantee. Over time, your company can establish business-specific credit.
- Features of your loan: Lower-risk loans have lower interest rates. Risk levels depend on things like the amount of your loan and any collateral you pledge to secure the loan.
- Characteristics of your business: Startups are risky to lend to, but if you have substantial revenue or you’ve been in business for several years, you’re a less risky borrower.
- Interest rates in the broader economy: Interest rates are typically set at a “spread” above market interest rates. For example, your rate might be 3 percent above the London Interbank Offered Rate (LIBOR). As market rates change, your rate is likely to change.
Different lenders offer different rates—even if everything above stays the same—so it’s helpful to inquire with several different lenders.
Where to Get a Line of Credit
A variety of financial institutions provide credit lines to businesses.
Online lenders are the newest option for borrowers. These services get funding from banks, investors, individuals, and other sources, and they tend to offer low-interest rates on business lines of credit. This category includes peer-to-peer lending sites, as well as marketplace lenders, focused on business loans.
Traditional banks and credit unions have a long history of providing businesses with credit lines. They’re still a good option, especially if you have an existing business relationship with a financial institution. Using a bank for your business checking account and merchant accounts may help you get approved and get a favorable interest rate. Local credit unions are especially likely to get to know you and your business, which may help if your creditworthiness is hard to prove.
Credit cards are technically lines of credit, and they’re typically easy to get approved for. Interest rates and fees on credit cards tend to be high, but you may qualify for deals and teaser rates—just don’t fall into the trap of running a balance and paying interest at double-digit rates.
SBA Loan Rates
Loans backed by the U.S. Small Business Administration (SBA) are a good option if you’re especially sensitive to interest costs. Those loans are issued by private firms like banks, credit unions, and online lenders, but the U.S. government guarantees a portion of the loan. As a result, lenders take less risk when they approve loans.
Interest rates on SBA lines of credit vary from lender to lender and depend on the criteria listed above. However, the SBA sets maximum limits on the spread that lenders can charge. For example, for SBAExpress loans, lenders can charge 4.5 percent to 6.5 percent over LIBOR. Compare that to credit card rates of 20 percent or more, and the additional legwork of applying for an SBA loan becomes more attractive.
Sample Rates From Selected Lenders
Looking for a rough idea of what lenders charge? You’ll see several popular offerings shown below, but these might not be the best fit for your needs. To ensure you get the best deal possible, shop among several lenders, including small financial institutions in your area. Remember that the lowest advertised rates are only available for ideal borrowers, and the definition of “ideal” varies from lender to lender.
As you evaluate lenders, look for those who prefer borrowers that fit your profile, such as your total revenue, length of time in business, and credit scores. Also, pay attention to additional fees, which add to your borrowing cost. Some lenders charge you for every withdrawal, while others charge a monthly maintenance fee—or no additional fees at all.
- Lending Club is one of the original P2P lending sites, and they offer business loans as well as personal loans. Interest rates on credit lines range from 7 percent to 22.60 percent.
- Fundera is an online service that connects small businesses to a variety of lenders. Rates for lines of credit range from 7 percent to 25 percent.
- Kabbage is a technology-based lender that provides short-term lines of credit. Pricing is quoted in terms of a “monthly Fee Rate” from 1.5 percent to 10 percent. To estimate an annualized rate, you’d need to look at total fees throughout the year.
- Bank of America is a standard “big bank” offering business lines of credit, including SBA loans and conventional loans. On unsecured lines of credit, advertised interest rates are “as low as” 5.75 percent. With collateral, the rate may be as low as 4.75 percent for prime borrowers.