Business Line of Credit Rates Explained
As start-ups and small businesses work to find their rhythm, the struggle to manage cash flow, fund day-to-day operations, and take advantage of new opportunities are common. Sometimes, this may necessitate taking out a loan to supplement cash reserves.
A secured business line of credit is an ideal lending resource that allows businesses to draw this capital when they need it. However, small business line of credit interest rates are something to watch out for, with the average interest rate on a line of credit ranging from 5% to over 20%. Here are some things you should consider if you are looking to keep your line of credit fees low.
What Is a Business Line of Credit?
A business line of credit is a lending option for small businesses that allows them to borrow up to a certain limit, and pay interest only on the portion used. It acts as a pool of money that can be drawn from as needed, with the flexibility to draw and repay funds as you wish, as long as it is within your credit limit.
Unlike regular loans where one gets a lump sum of money and interest payments begin immediately whether the money is used or not, a business line of credit is an open account that can be borrowed from at different times and in varying amounts.
Business Line of Credit: Advantages and Disadvantages
A business line of credit is an ideal borrowing option for many reasons:
- It gives a boost to businesses that need to manage cash flow, pay for a surprise expense, or even take advantage of an investment or expansion opportunity. This improved capital flexibility offers much-needed relief to business owners.
- Since interest is paid only on what is drawn, businesses can minimize costs by utilizing only what is needed. It is important to borrow from a lender that offers a reasonable interest rate for business loans to keep your aggregate costs low.
- Business line of credit rates usually accrue zero or limited interest if what is borrowed is repaid quickly.
- Paying off the debt reliably can help build your business credit history.
But like all forms of credit, it has its disadvantages:
- Extra charges can quickly add up. Even when offered a low-interest business line of credit, business owners should make sure to understand all other agreement terms.
- This lending facility can come with high-interest rates and poor terms for startups as they are considered “risky”. Unsecured commercial loan interest rates can be particularly steep.
- Lenders reserve the right to cancel your line or reduce your limit at any time. This can be disastrous if you were counting on the funds.
- There is a risk of building debt if your revenue drops or you misuse the credit.
What Determines Interest Rates
Typical line of credit interest rates are affected by several factors.
Business Credit
How high or low your business credit score stands is used to determine your business line of credit rate. A lender requires a solid history of borrowing and repaying loans.
Personal Credit
Some lenders take into consideration your credit score, especially with new businesses. It’s important to build and monitor both your business and personal credit if you want to get a favorable rate.
Industry
Different industries attract different lending terms as some are riskier than others. An import and export business is considered more volatile than a restaurant, for example.
Age
How long a business has been in operation is a determinant to the business line of credit interest rate. If you’ve been in business for several years, you’re a less risky borrower and can negotiate a lower rate than a new business.
Market Rates
Business equity line of credit rates are typically set above market interest rates. Your rate is also likely to change as market rates change.
How a Business Line of Credit Works
When a lender gives your small business a line of credit, they give you a set credit limit. You can access any amount of money up to that limit and keep drawing from and repaying as often as you need. For example, if your limit is $3,000, you can borrow and repay any amount below $3,000 multiple times for a set duration. Interest is charged only on the outstanding balance.
Lines of credit are different from term loans which give a one-time lump sum and charge you interest on the total amount. They are also usually unsecured.
At L3 Funding, we offer a variety of merchant funding solutions for your small businesses needs—including lines of credit. To get started, you can apply online. If you’re not sure whether a line of credit is the right option for you, give us a call for a free consultation! One of our representatives would be happy to help.