Of all the different small business loans and other financing solutions available today, a line of credit is one of the most flexible — and sensible — options. This article explains what a business credit line is and what it takes to qualify for one.
How does a business line of credit work?
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.
Typical uses for a credit line include many business needs like 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.
Here’s what you need to know and do to qualify for a business credit line. 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.
Small business line of credit qualification requirements
Here are the top factors lenders consider when reviewing business line of credit applications.
Personal credit score
A personal credit score of 500 will likely qualify for business lines 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 600 or higher. Plus, you’ll pay lower interest on borrowed funds and get more favorable terms, which is essential during this time of rising borrowing costs. To get the most attractive credit lines, like those offered by a bank or backed by the U.S. Small Business Administration (SBA), you must have an excellent credit score, ideally 660 or higher.
If your personal credit score isn’t good enough, take steps to improve it, like paying your bills on time, limiting your borrowing, and looking for errors on your credit report. Even if a lender checks your business credit score as part of the business line of credit application process, your personal credit score will weigh more heavily on their decision, so it’s critical to get it as high as possible.
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 between $25,000 and $100,000. For bank lines of credit, 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:
- Balance sheets
- Bank statements
- Business and personal tax returns
- Profit and loss statements
- Additional financial documents.
Time in business
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.
Collateral is used to secure a line of credit (referred to as a secured line of credit). The lender can seize and sell the collateral if a small business owner can’t repay borrowed funds. It can use the proceeds to recoup some of its losses.
Sometimes, you may need to put up traditional collateral, such as physical assets like art, vehicles, or real estate. In others, 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.
Current debt schedule
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 — and make monthly payments on — additional debt.
If you have existing debt, you must demonstrate a payment schedule you can afford. If you don’t have current debt, or very little, it’s usually a good sign for lenders.
Personal and business information requirements
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:
- Your personal and contact information
- Personal and contact information for all business owners
- Form of ID, usually a driver’s license or passport
- Employer identification number (EIN)
- Voided business check
- Business entity information
- Business licenses or permits
- Legal documents and agreements
- Tax forms
- Balance sheets
- Business financial statements
- Bank statements.
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. (You won’t likely need to submit a current business plan.) 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.
Benchmark business line of credit requirements
In the end, business line of credit requirements depend on the lender. However, here are some benchmarks that can help you determine whether it’s likely you’ll be approved.
- More than one year in business, preferably two or three
- $200,000 plus in annual revenue
- 620+ personal credit score
- 640+ business credit score
- Reasonable debt load and payment schedule
- Proof of identity, typically a driver’s license or passport
- Complete business and personal financial history documentation, including:
- Voided business check
- Bank statements, including your business checking account statement
- Balance sheet
- Profit and loss statements
- Business tax returns
- Personal tax returns.
Business credit line requirements: The bottom line
If you’ve read this far, you should have all the information you need to determine if you qualify for a business credit line.
Your credit score, annual revenue, and time in business are the three top factors lenders consider. In addition, they’ll evaluate your current debt schedule, ability to put up collateral, as well as general information about your business, its owners, and finances.
Remember: Different lenders have their own business line of credit requirements. If you’re not approved by one, you may have better chances with another, perhaps an online lender like Biz2Credit.