Running a business is an unpredictable affair.

When the economy is booming, you might see a flood of customers. The economy lulls, customers come in like a trickling stream in the summertime.

You still need to pay your employees. You still need to keep an inventory.

You really don’t want to apply for another loan. What else is there?

This is where a line of credit comes in. But is a line of credit really better than a loan?

The answer to that is “it depends.” And one of the biggest factors to consider is a business line of credit interest rates.

Here are the pros and cons of a business line of credit and the interest rates you should expect.

The Pros and Cons of Credit Lines

A line of credit is the opposite of an SMB loan. With an SMB loan, you get the money upfront, and you must pay it back or face consequences.

With a line of credit, you get access to money but you don’t “get” the money. You can leave the account open and borrow from it whenever you want.

You have the flexibility to pay before interest builds up or you can leave it until you can pay it (but you’ll accrue interest!).

This is what we call a revolving loan. The biggest risk is it’s less secure than a traditional loan.

The lender can close the account at any time. They could even reduce your credit limit when you were counting on the ability to draw a large sum later.

What’s more, the interest rates are higher than a traditional loan. If you get into the habit of accruing on the account and not paying, you’ll end up owing much more than you would with an SMB loan.

Which Factors Determine Rates

Your line of credit interest rate isn’t going to be exactly the same as your competitor’s. There are factors in a business which affect an interest rate.

  • Credit History: While bad credit is better than no credit, you want good credit! And if you have great personal credit, the lender will probably give you a decent rate for your revolving account.
  • The Economy: The market affects interest rates across the board. If the Fed decides to increase interest rates, you might be looking at a higher rate on your line of credit.
  • Loan Type: Because revolving loans are riskier to lenders, you’ll always see a higher interest rate on these kinds of loans.
  • Your Business: Startups are risky. Nearly half of all small businesses fail within the first five years. This means business loans of any kind will always be higher than other kinds of loans.

Average Business Line of Credit Interest Rates

Short term lines of credit will see rates as low as 1.5%. But those are generally for tech-based businesses. The most business line of credit interest rates start at 4-5% and go up to 22%.

Don’t just settle for any old line of credit. There are plenty of options out there. Some lenders might lend to specific industries as well.

If you’re still researching lines of credit rates, use our calculator to find out how much you need.