November 28, 2022 | Last Updated on: October 16, 2024
Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.
Of all the different small business loans and other financing solutions available today, a line of credit is one of the most flexible options available.
This article explains what a business credit line is and what it takes to qualify for a business line of credit.
A business line of credit provides you with a specified amount you can borrow against. You can draw funds in any amount up to your credit limit whenever you need them. You only pay back the funds you use and pay interest on that money. Unlike term loans and other lump sum types of financing, you don’t need to pay on a credit line until you actually use the money.
Business line of credit uses include supporting your cash flow, paying emergency expenses, supplying working capital, covering outstanding accounts receivables, purchasing inventory, or making payroll. Lines of credit don’t make sense for more extensive, longer term business financing needs.
Keep in mind that a business line of credit pricing comes with fees, potentially including prepayment penalties, draw fees, late fees, and more. So be sure to consider this when you’re shopping around.
Here’s what borrowers need to know about how to qualify for a business line of credit.
Be aware that requirements vary. Banks and other traditional lenders have stricter qualifying requirements than online lenders. You’ll typically pay lower interest rates and get more favorable repayment terms on a business line of credit from a conventional lender than an online one. Here are the top factors lenders consider when getting ready to pre qualify for a business line of credit.
A low personal credit score may qualify for a business line of credit, but they will come with higher interest rates and relatively small loan amounts. However, you’ll have more options available if your credit score is higher.
So if you anticipate applying for a business line of credit, take some time to improve your scores with the credit bureaus so you can get a competitive rate on a business line of credit.
If you’re applying for a business line of credit from an alternative lender or online loan provider, you’ll likely need a minimum annual revenue of at least $25,000. For lines of credit from a traditional bank, you’ll likely need higher revenue levels to qualify.
You may be required to submit a variety of financial documents to prove your annual revenue, as well as your cash flow and regular business expenses. Both of these factors will help a lender evaluate whether you can pay back the credit you’re applying for. Some of the documents that could be requested include the following:
You’ll find it easier to qualify for a business line of credit if you have at least six months in business, especially if you apply through an online lender. If you want the better rates and terms typically offered by traditional banks and credit unions, you’ll want to have at least one year — and preferably two or three — in business.
If you’re an entrepreneur seeking a business line of credit for a startup or relatively new business, you may find lenders that will approve you. You’ll likely need great qualifications in other categories, like credit history. You’ll also probably be asked to put up collateral to secure your credit line qualification.
Collateral is the underlying asset of a secured line of credit. This means that the lender can seize and sell the collateral if a small business owner can’t repay the borrowed funds.
Sometimes, a business line of credit with collateral is necessary, such as physical assets like art, vehicles, or real estate. In other business lines of collateral, you could be asked to sign a personal guarantee. A personal guarantee means you agree, as an individual, to pay back your borrowed funds if the business cannot.
Certain lenders secure credit lines by placing a UCC lien on your business. A UCC lien allows the lender to claim your business assets if you can’t repay your debt.
If you have bad personal credit or have been in business for a short time, you may be required to put up a relatively high amount of collateral to qualify and secure a business credit line. Conversely, if you have excellent credit and business financials and have been in operation a long time, you may not need to put up as much to get approved, or you could qualify for unsecured financing, often referred to as an unsecured business line of credit.
When you apply for a business line of credit, most lenders will want to understand your debt load, including how much you owe, and how much you pay each month. This could include both business and personal financing. This helps them understand whether you can afford to take on additional debt.
If you have existing debt, you must demonstrate a payment schedule you can afford.
Perhaps the most cumbersome part of the business line of credit application process is the information you need to submit so the lender can determine your eligibility, which could include:
Typically, if your fundamentals are good, you won’t need to submit as much paperwork to qualify for a business line of credit as you would for a term loan. In some cases, online lenders have automated systems that allow you to connect your business bank account, merchant account, accounting software, and other things, so your application can be evaluated virtually.
Business line of credit qualifications depend heavily on the lender and their underwriting requirements. However, here are some benchmarks that can help determine creditworthiness for a business line of credit:
Qualifying for a business line of credit can be a game-changer for your company, providing flexibility, increased cash flow, and opportunities for growth. However, like any financial decision, be sure to shop around with the hopes of receiving multiple credit offers to get the best credit approval possible.
A credit score of at least 600 is typically required to qualify for a business line of credit, though exact requirements can vary by lender.
Business line of credit qualifications typically include a strong personal and business credit score and well documented financial statements.
Find a few lenders that offer a business line of credit product and find out the rates and terms. If the rates and terms fit your needs, apply now.
A small business line of credit is similar to a credit card. It’s a pool of funds you can pull from as you need and pay back in monthly payments.
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