Economic downturns and seasonal slowdowns can leave your business strapped for cash. But financial stressors aren’t the only reason you might need a quick cash infusion.
When you see an opportunity that will spur growth, whether it’s equipment that’s gone on sale or a timely marketing campaign that will build brand awareness, you’ll need cash fast. But that means you won’t have time to apply for a term loan or raise funds in other ways.
In situations like these, many businesses look to short-term lending options, such as business lines of credit. This type of lending is common among small to mid-sized businesses (SMBs) — 40% of small business owners in the U.S. applying for financing in 2020 sought a business line of credit.
Luckily, around 73% of those applications get approval, making a business line of credit a quick and reliable way to get cash.
But before you apply, you need to know the requirements and how you can prepare to increase your chances of getting approved.
In this article, we explain the main business line of credit requirements and the application process, so you have all the information you need to apply with confidence.
Understanding Business Lines of Credit
A business line of credit works like a credit card. You have a maximum amount of money you can borrow — otherwise known as your limit. When you use your business line of credit to make a purchase, you will have to pay back the debt.
But you only need to pay interest on the portion you spend. This can be an advantage for SMBs that can repay their balance quickly
How Do Business Lines of Credit Work?
A business line of credit is a practical way to manage cash flow and get some financial protection, especially if you tend to have slow months or slow seasons. This kind of financing tool, often with different borrowing limits, can offer a lifeline during leaner periods. The appealing aspect of this line of credit is its longevity. As long as you adhere to the repayment schedule, you can use it indefinitely.
For illustration, let's say you apply for a business line of credit and get approved for a limit of $50,000. . Then, you receive a card to facilitate transactions related to your business.
For example, your business line of credit, you draw $10,000, you only pay back that portion in installments, with interest applying solely on the utilized amount.
A business line of credit lets you seize seasonal sales and bulk purchases. Potentially, you could access more affordable deals when purchasing inventory in bulk, fostering business expansion while conserving funds. During cash crunches, your business banking account coupled with the credit line offers solace.
It also comes in handy for daily operational costs — replenishing office supplies or refilling your delivery truck's fuel tank, for instance. By repaying most or the entire utilized amount each month, you maintain a low line of credit balance, thus incurring minimal interest.
Acquiring a line of credit holds an edge over a lump sum term loan: it's accessible anytime, and your borrowing limit remains at your disposal as long as the account stays active.
On the contrary, every time financial aid is needed with a term loan, you must initiate a new application. Moreover, juggling repayments of multiple loans can be challenging.
The charm of feasibility is not lost with a credit line — you can negotiate the repayment period and payment frequency with the lender. Such flexibility, perhaps opting for monthly or bi-monthly payments, enables better control over your cash flow.
What is Required for a Business Line of Credit?
A business owners personal credit history will play a vital role in determining credit worthiness. Personal FICO scores and the encompassing credit history are pivotal in shaping the creditworthiness of an individual, a crucial factor considered by credit bureaus and lenders. FICO scores can plunge to as low as 500, yet numerous business lines of credit necessitate FICO scores exceeding 660. Also, lending criteria aren't limited to your FICO score - an expansive credit history comprising mortgages, car loans or leases, and revolving credit also enters the equation. The accuracy of this comprehensive financial portrait helps decide eligibility, with an impeccable credit translating into better rates and terms.
Annual revenue requirements exist for most lenders offering business line of credit. With an annual gross revenue ranging from $500,000 and higher, most banks set certain boundaries for lending amounts. This established standard stands because a firm's consistent current earnings, largely determined by its gross revenue, play a crucial role in its capacity to maintain monthly, bi-monthly or weekly repayments over short terms, like 12, 24, 52 weeks. This emphasizes the significance of a company's annual gross revenue in meeting these loan qualifications.
Cash Flow Management
Managing cash flow in your business operating business bank account plays a significant role in the decision making process. This management task is crucial not only for daily operations but also in optimizing your financing needs. Remember that the banking process, particularly the underwriting process, considers certain aspects.
- Debts and credits
- The daily balance of your business bank account
- The number of cash deposits per month paired with the consistency of those deposits in business bank account
- It also assesses the volume of your cash reserves - an aspect that might tie into business loan prepayment provisions.
Understanding these points can influence your companies banking relationship, potentially offering you beneficial loan opportunities or preferable terms.
The following are all underwriting considerations for the financial stability of the business and the ability to acquire a business line of credit. These parameters help in thorough documentation of the company's financial health. They may include:
- Business tax returns, which are crucial documents outlining the company's taxation details.
- Profit & loss statement, highlighting the profits earned and losses incurred over a period.
- Balance sheet, which provides a snapshot of the company's assets, liabilities, and shareholders' equity.
- Accounts receivable, noting the money owed by customers for goods/services availed.
- Accounts payable, documenting the company's short-term obligations to its suppliers or vendor invoices. These comprehensive pieces of information collectively aid in assessing the viability for acquiring a business line of credit.
When a business has existing debt, whether it's in the form of default risk unsecured debt or otherwise, a lender will necessitate a comprehensive debt schedule. This includes vital specifics such as;
- The name of each lender
- The type of financing, notably if it places a lien on your assets or requires a personal guarantee.
- Repayment terms
- The payment timetable
- The current outstanding balance of each specific debt
- The credit status and history of the debt.
Collateral can come in many forms such as;
- Personal guarantee
- Real estate
- Business assets
- and other financial assets
Collateral is not required for all business lines of credit offers.
Time in Business
The length of time in business is a significant indicator of risk. Most business lines of credit, considering the qualification requirements, demand at least 2 years of business operations along with a proven track record of success. This criteria stands as one of the standard qualifications to establish eligibility for lines of credit.
The industry your business operates in may dictate what lenders will offer you a business line of credit and who will not. Certain industries can be viewed as higher risk than others. Rates, terms, and the overall offerings can also be significantly impacted by the industry. It's always wise to determine if your industry aligns well with the lender's current offerings before applying for a business line of credit.
When to Get a Business Line of Credit
Many small business owners struggle with cash flow. Indeed, cash flow problems are the number one reason for the downfall of SMBs. If your establishment seeks a relief to weather these cash flow complications, a business line of credit, with its flexible financing terms, may present a viable solution. But improving cash flow is only part of the value of this business financing option.
Here are some other modes where this small business lending solution can come into play:
- Covering routine expenses without impacting ownership rights.
- Managing recurring costs like utilities and subscription services.
- Administering staff compensation.
- Acquiring inventory or machinery.
- Settling business taxes.
Business lines of credit are an indispensable tool for businesses. Unlike traditional small business loans, your line of credit is at your disposal and an available asset in times of need. You can draw from this fund to handle unseen business expenses, as well as managing operational costs during a slack season or even during an invoice waiting period.
Lines of credit offers max loans of up to $250,000 for traditional lines, with jumbo lines available above that amount with higher scrutiny, which can boost your chances in turbulent times. Lastly, this type of financing grants you the peace of mind that you have a solid financial cushion to lean on in your business financing toolbox.
Secured vs. Unsecured Business Line of Credit
Most lenders offer two types of business lines of credit: secured and unsecured. Lenders approve a secured business line of credit for larger sums of money with additional concern on repayment fees.
For securing this type of loan, you’ll need collateral to qualify. Your collateral assures the lender that if you cannot make your monthly payments and are unable to handle the repayment fees, they can seize an asset of yours and cover the debt you owe. The benefit of secured credit lines is that they come with a lower interest rate.
However, an unsecured business line will have a higher interest rate and a lower limit coupled with higher repayment fees, but it requires no collateral. The appeal of this type of financing is that it’s easy to qualify for, even despite the potentially increased repayment fees.
Where to Get a Business Line of Credit
Like business credit cards, you can get a small business line of credit from various financial institutions. Companies such as Bank of America, Wells Fargo, Bluevine, and OnDeck provide diverse options for secured and unsecured lines of credit. Specifically, Bank of America, which requires companies to be in operation for at least six months, offers a cash-secured line of credit as a means to build business credit. Meanwhile, Wells Fargo, with over 7,000 branches in 38 states, offers the Wells Fargo BusinessLine® Line of Credit for businesses preferring a more traditional banking experience. Also, worth noting are Bluevine and OnDeck that offer quick access to funds with Bluevine offering decisions in as little as five minutes and OnDeck offering lines of credit range from $6,000 to $100,000.
Additionally, if you're interested in an SBA line of credit, the SBA CAPLines program might be a great choice; it offers up to $5 million in revolving credit and a declinable annual renewal offer.
Let's look at your two primary options:
a. Banks and Credit Unions
Banks and credit unions provide both secured and unsecured business lines of credit. They usually have more competitive interest rates than online lenders, but the eligibility requirements are strict, especially around the stability of your annual revenue and experience in business.
That's why banks and credit unions are often a good fit for established businesses rather than startups.
While paying a lower interest rate is great for any small business owner, banks and credit unions will ask you for collateral more often than not, and they can charge additional fees, such as annual and inactivity fees.
b. Online Lenders:
In recent years, online lenders have become very popular for business lines of credit. An online lender has more relaxed requirements and greater flexibility. These two things are ideal for startups and businesses that don't have a great credit score.
If you go to an online lender for a business line of credit, they will process it quickly — and you might be able to get your business line of credit within days. The downside is that you might also have to pay higher interest rates for a lower credit limit.
Considerations for Business Lines of Credit
Getting a credit line for your business has a lot of advantages, but there are a few rules and stipulations you should be aware of. In the matter of choosing the right lenders, consider that online lenders typically have streamlined application processes and fewer fees. They can issue small-business lines of credit swiftly, sometimes in a matter of days. A closer look at some necessary factors before finalizing your choice should involve the following:
- Some lenders have draw fees, hence anytime you withdraw funds, there may be an affiliated fee.
- You might have a minimum withdrawal amount that hinges on your limit.
- The unfortunate matter of inactivity fees is common, and you might incur those if you don't draw funds once within a defined period.
- There may be an origination fee for the lender to process your application.
- The matter of account maintenance fees can also come up with some lenders who charge to manage and keep your account active.
Before you sign a contract with a lender, go over the small print for these conditions. It's equally important to evaluate various options to secure the best possible financing for you.
Business Line of Credit Requirements and How to Apply
Whether you're applying for a secured or unsecured business line, both banks and online lenders have several application steps and requirements.
Lenders determine if you qualify by using risk-based models that take into account important financial aspects of your business. They often also need the business owner to prove that they have a good credit score or financial standing to qualify.
These requirements are in place so lenders avoid giving a credit line to a business that is unlikely to be able to pay it back. If the bank or online lender considers your application too risky, they will reject it, and you will have to look for other ways to improve your cash flow and finance business expenses.
Let's take a look at the application process and what’s involved, so you can determine whether you meet the standard business line of credit requirements.
Step #1: Submit an Online Application
Every bank, credit union, and online lender will have an application form for you to fill out. This is how they utilize their website browser interface to gather essential data about you and your venture. This information includes personal specifics such as your name, address, and contact info, which you should ensure to enter correctly.
The application will also require detailed business information including:
- Business name
- Business address
- Business contact information
- The industry you function in
- The products or services you provide
- The size of your employee force
- The reason for your credit line application
- Your ideal business credit line limit
Devote adequate time while filling out the application on the lender's website, ensuring that everything is correct.
Following the submission, the lender will establish contact with you, typically through a representative who will process your application through their browser-based system.
Step #2: Hand in Supporting Documents
This step is an essential part of your application process. Your lender representative will disclose which specific types of documents, pertinent to the applicant business, you have to submit to support your application. With this data in hand, lenders can better assess your eligibility; after all, most small business credit card issuers base their decision on the applicant's personal credit score and income from all sources. Some lenders will recommend you to hand in these documents online as part of the application, while others will request documents once you've submitted your application for your business.
a. Personal Credit Score
Even though you are applying for a business line of credit, lenders may ask for your personal credit score. They do this because you, as the business owner, are responsible for paying back your debt if the business cannot. This is called a personal guarantee.
So if your business goes bankrupt, you have to give a personal guarantee that you will pay back what you owe. If you are not the only owner, lenders will also consider your partner's credit score, and each one of you will provide a personal guarantee.
But what is a good credit score?
Lenders will consider 680 or higher to be a good credit score. That doesn't mean you can't get a business line of credit with a lower credit score, but the repayment terms, such as the interest rates, will be higher.
This is especially the case with traditional lenders, who expect a stronger personal credit history than online lenders will.
b. Business Credit Scores
Lenders will also look at the business credit score to help them decide if your business is stable enough to have a business line of credit and, if yes, what the limit should be.
If you have just started your business and it doesn't have a credit history, then lenders will only consider your personal credit score.
c. Business Financials
A crucial part of your application for a business line of credit (or any small business loan) is your business’s financial information. As part of your application, you will have to submit these financial statements:
- Cash flow statement
- Income statement
- Balance sheet
Lenders will use these to evaluate the overall health of your business, look into your business bank account to see the cash flow and match it with statements, and evaluate if your annual revenue is enough to qualify you for a business line of credit.
They will also calculate critical financial ratios such as your debt-to-equity ratio, current ratio, and fixed-charge coverage ratio.
They use these ratios to see if your other debt — a small business loan or a business credit card, for example — affects the business income to such a degree that you can't pay back the business line of credit.
d. Time in Business
Lenders know that small businesses have a high failure rate, and many won't make it past the two-year mark. So they are cautious about giving a business line of credit or any type of financing to very new startups.
Most lenders will not provide large credit line limits or unsecured lines of credit to businesses younger than two years. These businesses will also have a higher interest rate and shorter repayment terms. If you want your repayment time to be longer than five years, be prepared to offer collateral.
e. Availability of Collateral
If you want a business line of credit with a high limit, lower interest rates, and longer repayment time, or if you have a business that is younger than two or five years, the lender will also look at the availability of collateral.
Collateral ensures that if your business and you personally cannot make credit line payments, then the lender can rely on seizing your collateral to cover the debt and avoid losing significant amounts of money.
You also need collateral if you're applying for a secured business line of credit. To prove that the collateral is legitimate, you’ll need to submit documents showing that you or the business are the collateral owners.
Step #3: Wait for Processing
Once you submit all the necessary documents, lenders will process your application. During this step, they’ll consider all the information you submitted, including your application, annual revenue, business tax returns, and business bank statements to determine whether you deserve an offer.
Step #4: Get a Response from the Lender
After processing, lenders will get back to you with an answer. This could be in the form of a phone call, email, or a notification within the application platform. Part of their response often includes detailing the associated costs - which in some cases go beyond the sole interest rate - like potential prepayment fees. It's always advisable to look out for a lender that doesn't charge extra origination fees, monthly maintenance charges, or prepayment penalties.
Step #5: Use Your Business Line of Credit
If your business line of credit application is approved, you can start using the funds to improve your cash flow and grow your business. Yet, it's essential to remember that when you opt for a business line of credit, unlike a rewards program associated with credit cards, you won't receive business line rewards. Nevertheless, you can strategize to reap the benefits of both spheres by using your credit card for expenditures and earning rewards, and then clearing the balance with the line of credit.
If the application is denied
You have the right to ask for specific reasons. Once you understand why you were denied, you can work on bettering your application and fulfilling the requirements, so you can reapply later. If your application was rejected due to short credit history of your business or a low credit score, you can focus on enhancing these aspects over the ensuing months and apply again.
Other Options for Financing
Business lines of credit are not the only financing instrument for small businesses. You can also apply for other types of business loans, including:
- Business credit card, which is similar to a business line of credit but may have a higher interest rate.
- Merchant cash advances, which take a percentage of your daily or weekly revenue to pay back a lump sum amount.
- Small Business Administration (SBA) loans, which are low-interest loans for small businesses and startups.
Frequently Asked Questions
How hard is it to get a business line of credit?
A business line of credit can be somewhat challenging to secure due to its attractive features such as flexible rates and on-demand fund access, pushing lenders to be discerning in their approval process. Thus, securing a business line of credit is often categorized as difficult.
Can I get a business line of credit with Bad Credit?
It is not ruled out entirely, but those with bad credit might find higher difficulties when applying for a business line of credit due to the increased risk factors associated with this profile from the lenders standpoint.
How fast can I get a Business Line of Credit?
Swift approvals can be achieved, particularly with online business lenders who can offer business lines of credit in as little as 24 hours. Traditional banks however, typically require a longer processing period that extends to weeks rather than days. Be aware though, the approval rate and terms may vary based on the speed of the process.
Why should I get a business line of Credit?
A business line of credit boasts distinctive features not typically available with traditional business term loans. You can get approved for one, leaving it open and active without having to utilize it, thereby conserving funds typically spent on other financial options. It's a prudent option to keep available for untimely financial hitches that can occur in the course of running a business.
Business lines of credit can be a huge help for small businesses looking to grow. Qualifying for this type of financing starts with knowing the requirements, preparing the necessary paperwork, and choosing the right lender.
If you're considering applying for business credit lines, then you can use a credit calculator and compare lenders and conditions in the best small business marketplace.
AdvancePoint Capital not only allows you to apply in just a few minutes, but it also provides various financing options, and lets you choose what works best for your business.
On top of that, the application process is streamlined with minimal paperwork.
What is Required for a Business Line of Credit? to get started and receive financing in as little as 24 hours.