Current 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 using only what you need from an available pool of money. But predicting your borrowing cost is hard. Interest rates for business lines of credit might run anywhere from 5% to more than 20%.
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.
Improved flexibility with cash flow
Zero or limited interest if repaid quickly
Helps with unexpected expenses
Multiple lending options to choose from
Potentially high interest rates applied to your balance
Risk of lender reducing or eliminating credit line
Poor terms for start-ups
Risk of building debt if revenue dips
Pros and Cons of Business Credit Lines
A line of credit is a pool of money you can draw from as needed. You 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 typically have the flexibility to repay your debt, leave the account open, and repeat the process if you need to borrow money again later.
Because you can keep a zero loan balance, lines of credit help you minimize interest costs. For example, you might use only the funds to buy extra inventory or hire additional help before a particularly busy season. Repay the loan quickly, and you’ll avoid interest costs during the rest of the year.
If you use a line of credit for unexpected expenses, you avoid paying interest—unless and until the unexpected happens.
The primary risk with 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, which can leave you in a lurch.
You need to be prepared for the possibility of this resource disappearing when you need it most.
What Determines Rates?
Several factors impact the rates you pay on business lines of credit. Ultimately, it comes down to how the lender evaluates the amount of risk involved with your loan.
- Your credit history: Lenders want to see a consistent 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 potentially 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. Because lenders can take the collateral and sell it, pledging collateral reduces risk.
- Characteristics of your business: Startups are risky to lend to, but if you have substantial revenue or have been in business for several years, you’re a less risky borrower.
- Interest rates in the broader economy: Interest rates are often set at a “spread” above market interest rates. For example, your rate might be 3% above the London Interbank Offered Rate (LIBOR) or the Prime Rate. As market rates change, your rate is likely to change.
Different lenders offer different rates—even if all of the characteristics above are the same—so it’s smart to get quotes from several different lenders.
Where to Get a Line of Credit
A variety of financial institutions provide credit lines to businesses.
Online sources and fintech providers are the newest options for borrowers. These services get funding from banks, investors, individuals, and other sources, and they often 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
Don’t ignore “traditional” financial institutions, which 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 one of these banks. Using a bank or credit union for your business checking account and merchant accounts may help you get approved—and get a good 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.
These revolving loans 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, with the average rate around 20% APR. But you might qualify for deals and teaser rates. Just don’t fall into the trap of running a balance and paying interest at double-digit rates over long periods.
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 these loans.
Interest rates on SBA lines of credit vary from lender to lender and depend on the criteria described above. However, the SBA sets maximum limits on the spread that lenders can charge. For example, for SBAExpress loans, lenders can charge 4.5% to 6.5% over LIBOR. Compare that to credit card rates of 20% or more, and the additional legwork of applying for an SBA loan becomes more attractive.
Sample Rates From Selected Lenders
Are you curious how much some of the most popular lenders charge? You’ll see several offerings below, but these might not be the perfect fit for your needs. To ensure you get the best deal possible, shop among several lenders, including small banks and credit unions in your area. Remember that the lowest advertised rates are only available for borrowers with the best finances, and that definition can vary from lender to lender.
As you evaluate lenders, look for those who prefer borrowers that favor businesses with your profile: companies with similar revenue, length of time in business, and credit scores. Also, pay attention to additional fees, which add to your total borrowing cost. Some lenders charge you for every withdrawal, while others charge a monthly maintenance fee—and some have no additional fees at all.
- Fundera is an online service that connects small businesses to a variety of lenders. Rates for lines of credit range from 7% to 25%, with rates near the lower end if you have good credit.
- Kabbage is a technology-based lender that provides short-term lines of credit. Pricing is quoted in terms of a “monthly Fee Rate” from 1.25% to 10%. To estimate an annualized rate (if you’ll borrow year-round), 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” 4.50%. With collateral, the rate may be as low as 3.75% for prime borrowers.
- Lendio works with numerous partners, including online lenders and traditional financial institutions. As you might expect with a wide variety of sources, rates range anywhere between 8% and 24% APR, depending on creditworthiness and other factors.
There’s no centralized database of rates (it wouldn’t be possible, with the unique characteristics of every business and different lender offerings), so you need to contact lenders to get numbers that are relevant to your situation.
U.S. Small Business Administration. "The Right Way to Think About Credit Lines for Business." Accessed July 8, 2020.
Kabbage. "Small Business Line of Credit." Accessed May 3, 2020.
Kabbage. "Loan Rates and Terms." Accessed July 8, 2020.
LendGenius. "Business Line of Credit—Your Best Options." Accessed July 8, 2020.
National Credit Union Administration. "Personal Guarantees." Accessed July 8, 2020.
U.S. Small Business Administration. "Why a Business Line of Credit May Be a Smart Choice for Your Business." Accessed July 8, 2020.
Bank of America. "Unsecured Business Lines of Credit." Accessed July 8, 2020.
Bank of America. "Secured Business Line of Credit." Accessed July 8, 2020.
U.S. Small Business Administration. "Quick View Loan Chart." Accessed July 8, 2020.
Fundera. "Business Lines of Credit." Accessed July 8, 2020.
Lendio. "Frequently Asked Questions." Accessed July 8, 2020.
Lendio. "Business Line of Credit." Accessed July 8, 2020.