A business line of credit is the perfect lifeline for businesses of all sizes. Whether you have a huge opportunity on hand or need to solve a problem, this financing option gives you a simple, fast, and easy way to cover expenses.
You can draw more as you go, you only pay interest on the amount you draw, and more cash becomes available as you pay it down. For many small business owners, the question becomes: what business line of credit rates can you get?
The business line of credit rates can vary significantly depending on your business, the economy, and the type of lender you go to. Typically, it’s easier to qualify for the best rates in a booming economy than a difficult one. Here’s what you need to know about business line of credit rates.
What Is the Average Interest Rate on a Business Line of Credit?
The average line of credit interest rate ranges from 8% to 60%, depending on your business, the lender you’re working with, your willingness to offer collateral, and the economic conditions surrounding the transaction.
Lines of credit tend to carry higher interest rates than standard business loans, but the interest structure lessens the impact. Since borrowers only pay interest on the amount drawn, they can strategically reduce the amount they pay in interest through responsible cash management.
Average Rate for Business Lines of Credit By Lender Type
These are the average line of credit interest rates for 2023:
|Type of Financing
|SBA Line of Credit
|Prime rate + 1.25%
|Prime + 2-3%
The type of lender you apply through can also play into your provided rates. Traditional lenders offer lower rates but have substantially higher requirements and, often, a more difficult process.
Keep in mind that business loan interest rates are affected by the economy. In 2023, the fight against inflation pushed the prime rate to 8.25% as of May, which subsequently increased the average interest rate on almost all financing products.
As long as you can secure a rate that aligns with your business, lines of credit are powerful resources for businesses with unknown expenses ahead. However, they’re not the only option available to you. These are the 2023 rates for other popular financing options, including small business loans:
- Term Loans: 9% to 30%
- Equipment Financing: 9% to 50%
- Revenue-Based Financing: 1.2 to 1.5 factor rate
- Accounts Receivable Financing: 1.2 to 1.5 factor rate
- Asset-Based Lending: 9% to 20%
Like lines of credit, rates on these financing options will vary based on where you go.
What About Interest Rates on Unsecured Business Lines of Credit?
Unlike secure business lines of credit, unsecured options don’t require collateral. While this structure benefits the borrower, it means the lender must take on more risk. For this reason, interest rates for unsecured lines of credit tend to be higher.
An unsecured business line of credit may be the only option for businesses that don’t currently own real estate. Without real estate to put up as collateral, an unsecured product may be the only option.
While you can obtain an unsecured line of credit, getting a business line of credit without a personal guarantee is a different story. Essentially, a personal guarantee means that you’re personally liable to pay back the interest in the event your business defaults.
How Loan Amount and Term Can Affect Interest Rate
The amount and term you’re seeking will impact the interest rate imposed by lenders. This is primarily due to risk, as lending more money and reducing repayment periods elevate the risk of a borrower defaulting.
If you’re seeking a higher funding amount, expect to see a higher interest rate than you would on a lower amount. Lending more money translates to more risk for the lender, so they’ll impose a higher rate as a method of recouping as much as they can in the case that the borrower defaults.
Longer repayment periods give borrowers more time to pay back the entire borrowed amount, which allows lenders to offer lower interest rates. However, this doesn’t mean that the borrower pays less interest than short-term financing. Since the borrower will stay in debt for longer, it often results in more interest payments and, therefore, more interest paid.
What to Expect With Bad Credit
The business line of credit rate that a lender quotes you is a representation of the risk they perceive based on your business. Lenders determine this risk based on your credit score, along with a number of other factors. In many cases, having a lower credit score may cause you to receive higher rates.
However, that doesn’t mean you’re out of options. Traditional lenders tend to weigh credit score as a more important factor, but for online lenders, it’s only a piece of the puzzle.
In other words, bad credit certainly won’t put you out of the running—but it could mean you’ll qualify for higher business line of credit rates.
How to Get the Best Interest Rates on a Business Line of Credit
There are a few strategies to improve the interest rate on your financing, including:
- Offer Collateral – Secured lines of credit carry lower interest rates than their counterparts. If possible, consider collateralizing an asset to reduce rates.
- Sign a Personal Guarantee – Personal guarantees make the borrower personally responsible for repaying the borrowed amount in a default situation. It’s risky, but if you need a lower rate, signing one can potentially improve your terms.
- Proactively Strengthen Your Credit Score – Your credit score plays a major role in determining your interest rate. For borrowers with lower scores, it’s worthwhile to spend time building credit before applying.
- Negotiate With Your Lender – While you won’t be able to make major changes to your rate without good reason, it’s possible to negotiate a better rate by speaking to your lender.
- Shop Around – There’s no obligation to finalize the first offer you receive. To ensure you’re getting the best rate, it’s important to apply with multiple lenders and compare your approvals.
The Requirements for a Business Line of Credit
Your business line of credit interest rate offer will be dependent on a number of factors. However, not every lender calculates rates using the same formula—your offer can vary based on where you go.
Lenders tend to consider:
- Your time in business: The longer you’ve been operational, the better
- Your business’s annual revenue: Online lenders will require a minimum of $150K, while more traditional lenders may have higher expectations
- Credit score: The higher your credit score, the better options you’ll receive (though you may still qualify for a business line of credit with a lower score)
- Industry: Higher-risk industries generally lead to higher interest rates
Some lenders that only offer secured lines of credit may require collateral as well. Even if you can receive an unsecured line of credit, putting up collateral may lower your rates—but be careful of putting your home up for business financing.
As a startup with over 6 months in business, you should have some options, though you may not be able to make the same comparisons as other business owners.
Overall, lenders tend to evaluate your risk based on different models. If you’re searching for financing and receive a high interest rate from a bank, remember that other lenders may look at your business in different ways.
In the current landscape, qualifying for a low business line of credit rate might be more challenging. Before offering an approval, lenders will take a close look at how you’re performing post-covid. Because nearly every business and industry was affected, lenders are paying close attention to recent performance.
Most importantly, they’ll look at your annual sales, as well as monthly sales and, possibly, month-to-date numbers.
Your business’s location could play a crucial role in determining business line of credit rates (and approvals), too. As the nation continues to adapt, coronavirus numbers everywhere are changing—and with them, small business operating rules. Chances are, states and cities with higher COVID-19 numbers may have more trouble obtaining better offers due to the potential for restrictions or a shutdown.
You can calculate your estimated payback amounts using a business line of credit calculator.
Learn Your Business Line of Credit Interest Rate Options
Why wait when you can learn your options in seconds?
At National, we work within our 75+ lender platform to help you find your options through a fast, simple, and easy process. The application takes 60 seconds, and your business could be funded in just a few hours.
With a true revolving line of credit, you can draw even more cash as you pay it down—and without applying twice.
Get started taking things to the next level by applying now!