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What is a business line of credit? Understanding BLOCs

A business line of credit has many benefits, such as flexibility and accessibility. Learn about what a business line of credit is, and how it can benefit you.

Updated

8 min. read

A business line of credit (BLOC) is a flexible funding solution that allows business owners to borrow money as needed from a bank or financial institution. You may use a BLOC to cover short-term expenses for operations, capital projects, and payroll. As with a credit card, you will only pay interest on a line of credit for the amount you use. Understanding what a business line of credit is could help you decide whether this type of financing may be right for your company.

What is a business line of credit?

A business line of credit can help you pay for short-term expenses without having to apply for a separate business loan each time. After qualifying for a BLOC, you may access funds up to your pre-set limit to cover things like seasonal hiring, a holiday promotion, or an emergency expense. In 2023, just over one in three small businesses used a BLOC on a regular basis, according to the Federal Reserve Bank's Small Business Credit Survey.^{footnote 11}

How does a business line of credit work?

Once you set up a business line of credit, you can use as much or as little of the funds as you need. You'll pay interest on the amount borrowed — not the total limit. Typically, a BLOC is a revolving credit line — meaning that as you make principal payments against the balance, those amounts become available for you to draw again in the future.

Many business lines of credit share the following features:

You may use a business line of credit for short-term business expenses, including operating costs, working capital needs, and payroll.
You may use a business line of credit up to the approved credit limit. (Note: Some banks may have a limit on how many draws can be made in a month and may include a minimum draw amount.)
You may be able to link a business line of credit to a business checking account, for overdraft funding protection.

How do you pay back a business line of credit?

BLOC users will typically receive a monthly statement that shows the amount borrowed and total owed, including accrued interest. The monthly payment may only cover interest or may also apply to a portion of the principal. Some BLOCs require automated clearinghouse (ACH) payments.

Some financial institutions report on BLOC payment activity to business credit bureaus, like Experian and Equifax, or business data organization like the Small Business Financial Exchange (SBFE). This reporting can impact your business credit scores, which are tracked separately from your personal credit score.

“You may use a business line of credit for short-term business expenses, including operating costs, working capital needs, and payroll.”

Business line of credit pros and cons

Every business has unique financial needs, so it's a good thing a wide variety of business lending options exist. To decide if a business line of credit is the right option for you, here are some pros and cons of a BLOC:

Pros

Interest rates. In some cases, the interest rate can be lower on a business line of credit vs. business credit cards. But this isn't always true, as your interest rate could depend on factors such as your business credit score, annual revenue, and time in business.
Accessibility. Some borrowers may find fewer barriers to entry for a business line of credit compared with a traditional business loan. The Small Business Administration, for example, offers the Working CAPLine program for companies that may not qualify for long-term credit.^{footnote 22} Also, BMO's business line of credit offers a simplified application that may streamline a credit decision.
Flexibility. You can make withdrawals when needed, and you may be able to move funds from your business line of credit to a business checking account through mobile, online, or phone transfers, as well as in-person at a branch.
Ability to build business credit. If the bank providing the BLOC reports payments to business credit bureaus or SBFE, this may help build business credit if you make payments consistently and on time.
Build your banking relationship. If you have a business bank account with the same institution, opening a BLOC can deepen your banking relationship, allowing your banker to better understand your business's financial needs and potentially offer more customized service.

Cons

Interest rates. The amount of your payments may not be consistent over time, due to any fluctuations in a variable interest rate.
Impact on business credit. If the lender issuing the BLOC reports payments to business credit bureaus or SBFE, and you miss a payment, your business credit score could be affected.
Fees. A business line of credit may charge an annual fee, as well as charges for set-up, non-usage, late payments, early termination, and administrative costs.

Some pros of a business line of credit include accessibility, flexibility, ability to build credit, and ability to build your banking relationship.

How is the interest rate calculated for a BLOC?

BLOCs typically have a variable interest rate, which means the rate changes over time based on a variety of factors.

The interest rate may take into account annual revenue, credit history, and length of time in business.
Rate discounts may also be available based on your business and/or personal banking relationship with the bank and/or if you set up automatic loan payments from your business deposit account. BMO, for example, offers a Relationship Rate Reduction and Automatic Payment Discount to eligible customers.^{footnote 33}^{, 4footnote 4}
Interest is calculated from the date that the money is withdrawn.
Interest is calculated only on the amount borrowed — not the credit limit.

Secured vs. unsecured line of credit

A business line of credit may be secured, meaning it's backed by equipment, real estate, or some other form of collateral. A BLOC can also be unsecured, meaning no collateral is required. To qualify for an unsecured BLOC, you may need to have operated for a certain period of time or show growth in annual sales, as well as meet a benchmark credit score.

Here are some key differences between these two types of financing:


Secured line of credit	Unsecured line of credit
Backed by a business asset (equipment, inventory, blanket lien, real estate, etc.)	Not backed by a business asset
May offer a higher credit limit	May offer a lower credit limit
May have a lower interest rate	May have a higher interest rate

How to choose a business line of credit

Here are some key factors to consider when choosing where to open a business line of credit:

Credit requirements. Each lender will have different credit requirements to qualify, including for personal or business credit scores, minimum annual revenue, and years in operation.
Fees. Consider the fee structure for a line of credit compared to other types of financing and how the fees will affect your overall business costs.
Interest rate. Estimate and compare your potential costs based on your interest rate. Factors that may affect your interest rate include your personal or business credit reports and whether the business line of credit is secured or unsecured.
Repayment terms. Review the repayment requirements. Do they align with your operations and revenue flow? Options might include interest-only installments, with a deferred repayment of the principal, or some combination of interest and principal payments. Payments may be set on a weekly, monthly, quarterly, semi-annual, or annual schedule.
Maximum limit. The total amount of your line of credit will vary, depending on the lender. BMO, for example, offers amounts ranging from $10,000 to $1 million.^{footnote 55}
Other banking products. Some banks may require you to have a business bank account or business deposit account with them to apply for a line of credit.^{footnote 44}

Business line of credit vs. credit card vs. traditional loan

Deciding between a BLOC, business credit card, and a traditional business loan? Here's a side-by-side comparison:


Feature	Business Line of Credit	Business Credit Card	Business Loan
Apply for a new loan each time you need funding	No	No	Yes
Receive lump sum	No	No	Yes
Available as needed	Yes	Yes	No
Secured/ unsecured financing options	Yes	Yes	Yes
Fees	Yes	Yes	Yes
Variable interest rate	Yes	Yes	Yes

Frequently Asked Questions

Have more questions? A lot of business owners do. Here are some common BLOC questions.

You may be able to qualify for a business line of credit with poor or limited personal or business credit history, but it will depend on the individual lender. A lender may restrict the total amount of the credit line, require payments on a weekly or biweekly schedule, and only provide short-term financing.
Each lender will offer different repayment terms, ranging from a few weeks to several years.
To increase the limit on your business line of credit, you might need to provide additional collateral or a guarantor, someone who pledges to pay your debt if you are unable.
Typically, you may withdraw cash from a line of credit. You may also receive a dedicated card that can be used to draw down your line of credit.
Evaluating whether a business loan or line of credit is better will depend on multiple factors, including the stage of your business, funding needs, personal and business credit rating, and revenue.
A business line of credit could impact your personal or business credit scores and can depend on factors such as whether the business is a separate legal entity from the business owner and if you were asked for a personal guarantee during the application process. Impact on your personal or business credit may vary. On-time payment history can have a positive impact on your personal or business credit scores. Late payment may negatively impact your personal or business credit scores.