Understanding Small Business Lines of Credit

Chris Hammel, Senior Credit Analyst, First Republic Bank
September 22, 2021

Even the most successful businesses need flexible access to cash from time to time. Covering shorter-term cash flow needs, such as payroll and pay-out bonuses, can be pivotal to business growth. And for business owners looking for convenient ways to access funding, a small business line of credit can be a great option. 

A small business line of credit helps you finance purchases without having to tie up your working capital. This provides you with greater flexibility to operate and grow your business, all while maintaining liquidity.

Here’s what you need to know about how small business lines of credit work and whether they’re the right option for you.

What’s a small business line of credit?

A business line of credit gives borrowers access to a set amount of funds up to what’s known as a draw limit — or the maximum amount you can borrow at a time.

Just like with a credit card, you can pull from these funds as often as you like, up to the limit, within the draw period. Amounts re-paid during the draw period may be re-borrowed.

Although these products function similarly to a credit card, small business lines of credit interest rates are usually much lower. As a result, these more cost-efficient than credit cards and are a good option for short-term financing.  

Secured vs. unsecured lines of credit

There are two ways to categorize a small business line of credit: secured vs. unsecured. Unsecured small business lines of credit can be easier to get for applicants with stronger credit, while secured small business lines of credit are better tailored toward those who may not have a strong or long-standing credit history. Here’s how they both differ: 

Secured Small Business Line of Credit

Unsecured Small Business Line of Credit

Does not require assets to be put up as collateral to receive the loan

Requires collateral to receive the loan

How does a small business line of credit work?

A small business line of credit makes it easier for you to access funds when you need them. Interest is applied only to the money you actually draw from the line of credit, as opposed to a term loan, in which you pay interest on the full loan amount.

Small business lines of credit give owners more freedom when borrowing the funds needed to grow or sustain their business. For example, a small business line of credit can help you shore up your working capital if you’re dependent on seasonal income, or if you have to deal with an unexpected shortfall with pending invoices. These are just two examples among many.

What are the requirements for a small business line of credit?

There are various requirements you should be aware of before applying for a small business line of credit. Lenders will assess your company’s financial history,  including business credit scores, personal credit scores of guarantors, company assets, cash flow, years in operation and the specifics of your industry. Requirements between lenders vary, so be sure to check with yours before applying.

After you’re approved for a business line of credit, lenders provide you with access to the full line of credit commitment which you use on an as-needed basis. Amounts borrowed are generally repaid via receivables. Amounts repaid are available to pull from again, during the draw period.

Depending on the lender, there may be fees associated with your small business line of credit, including origination fees, monthly fees and annual fees — typically levied if you don’t use your line of credit.

Small business line of credit vs. business credit card

You’re probably familiar with business credit cards already, but you may wonder how they compare to a small business line of credit. The two share some overlap, but they also have some significant differences, as well. Most of their differences boil down to how you plan to use the funds, as well as your personal credit score as guarantor, business credit score and financial statements indicating your company’s financial health year-over-year.

Here are a few of the main differences between a small business line of credit and a business credit card: 


Small business line of credit

Business credit card
Repayment Typically doesn’t come with an interest-free grace period; repayment begins once the period ends. Some cards may offer an interest-free grace period
Rewards Does not offer rewards May offer various rewards like cash back or travel rewards
Qualifications Can rely on the owner’s credit history or the company’s income Relies on the owner’s personal credit history
Best used for Shorter-term expenses that may exceed monthly cash on hand Smaller, ongoing business expenses that can be paid off within the month

Now that you know what pros and cons come with either a small business line of credit or a business credit card, you can be confident going into the process of choosing which one works best for your business.

Is a small business line of credit right for my business?

There are many ways to get the financing you need for your business — whether it's managing everyday expenses, seasonal costs or unexpected circumstances. The good news is that there is a variety of borrowing options for you to choose from, based on your specific needs.

If you’re looking for flexible financing that you can pull from repeatedly — but also comes with lower interest rates than a business credit card — then a small business line of credit may be the right option for you.

Small business lines of credit help you borrow cash on an as-needed, revolving basis. You can use them to pay for expenses up to the loan limit, and you only pay interest on the funds you “draw.”  Amounts repaid during the draw period may be re-borrowed, meaning you don’t have to apply for a loan each time you need business funding.

First Republic Bank’s business lines of credit are designed with you in mind. First Republic clients benefit from a streamlined application process, quick decisions made by your dedicated business banker and customized personal banking solutions for you and your employees. Plus, First Republic Bank’s longstanding commitment to small businesses means you can work with an experienced financial partner you trust — all while getting access to the capital you need to keep your business growing.

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