How to Get a Business Line of Credit: List of Requirements Explained
Entrepreneurs frequently weigh their financing options to fuel their business growth or expansion. A business line of credit is a viable choice for those seeking a flexible means to access capital when needed. Compared to other financing options, a business line of credit is generally more budget-friendly.
Unlike other small business loans, a business line of credit has distinct requirements.
The qualifications can vary significantly from one lender to another. To increase your chances of approval, it's essential to understand the requirements before applying.
When applying for a small business line of credit, lenders typically consider the following eight key factors:
- Length of time the business has been in operation
- Business credit score
- Personal credit score
- Annual business revenue
- Collateral requirements
- Financial statements
- Industry expertise
- Other business, personal, and banking details
Let's explore the requirements for a business line of credit in more detail and learn more about this type of business loan.
Qualifying for a Business Line of Credit
When applying for a business line of credit, lenders consider a range of factors, ultimately aiming to generate a profit from the loan.
If the assessment reveals a high risk of default, the line of credit may be denied.
Another crucial aspect to consider is the interest rate, which is often tied to the loan.
Most lenders employ risk-based pricing models, which charge higher interest rates for businesses deemed capable of repaying the loan on time.
Business Line of Credit Requirements
When it comes to securing a line How to Get a Business Line of Credit: List of Requirements Explained credit, lenders scrutinize a multitude of factors to determine a business's eligibility.
While it's impossible to cover every scenario, here's a general outline of the key requirements to consider.
1. Proven Track Record
Established lenders prioritize longevity and success, as the statistics on business failure are daunting. A staggering 20% of small businesses fold within the first year.
While a two-year minimum operation period is often the benchmark, there are exceptions. A fledgling startup, for instance, might be able to secure funding through a business line of credit if the owner possesses solid collateral, a strong personal credit profile, and is willing to personally guarantee the loan.
2. Business Credit Score
Business lenders scrutinize not only your personal credit history but also your business credit reports and scores.
This comprehensive review enables them to assess the level of risk involved in approving a business credit line. For new or unestablished businesses, lenders may also examine your personal credit scores How to Get a Business Line of Credit: List of Requirements Explained gauge your creditworthiness.
Fortunately, you can obtain a business credit score report through Nav, providing valuable insights into your business's credit history and helping you make informed decisions.
When it comes to securing a business line of credit, a personal guarantee is often a must. This means that if your business is unable to repay the debt, you, the business owner, will be personally liable for the repayment. Typically, lenders require a minimum FICO credit score of 680 or higher. Additionally, if you own 20% or more of the business, a personal credit check will be conducted on you.
Fortunately, you can check your personal credit score for free on reputable websites such as Experian and Equifax.
4. Annual Revenue
As lenders become more discerning, the focus is shifting to a business's revenue and cash flow. Typically, lenders require a minimum of $100,000 or more in revenue from traditional lenders or $50,000 from online lenders. To demonstrate a strong revenue stream, lenders often request to see your business's bank account statements.
5.
Collateral
Collateral represents any asset that can be leveraged to settle a debt obligation. This can include accounts receivable, inventory, real estate, financial instruments, and machinery, among other examples.
Typically, a business line of credit is secured by collateral, with the specific asset serving as a guarantee to repay the loan if the business is unable to do so.
When evaluating a business loan, lenders scrutinize the financial position of the business, as revealed in the financial statements.
This can How to Get a Business Line of Credit: List of Requirements Explained the business balance sheet and profit and loss statement, as well as other financial documents. Lenders may also assess the current, debt-to-equity, and fixed-charge coverage ratios, as well as other financial metrics to gauge the business's financial health.
High-risk businesses, such as those in the electronics, cannabis, and credit repair sectors, are often viewed as such due to their volatile nature, characterized by high turnover rates, substantial sales volumes, and the potential for chargebacks.
When lenders assess the creditworthiness of potential borrowers, these factors are taken into account. However, a proven track record of successfully launching businesses in the same industry can serve as a mitigating factor, suggesting to lenders that the applicant is a more manageable risk compared to those with no industry experience.
Nevertheless, a lack of prior experience does not automatically guarantee a loan denial, as lenders will consider a range of factors in their evaluation.
8. Additional Business, Personal, and Banking Information
Due to the varying requirements of lenders, some may request supplementary information to assess the creditworthiness of a business.
In particular, lenders may seek more information about a business that is relatively new to the market or lacks a credit history. In such cases, lenders may also inquire about the applicant's personal accounts, as these can serve as How to Get a Business Line of Credit: List of Requirements Explained proxy for their creditworthiness.
How Does a Business Line of Credit Work?
Imagine your company has secured a maximum loan of $50,000.
Currently, you're required to take out a $10,000 loan to How to Get a Business Line of Credit: List of Requirements Explained the opening of a new branch. You'll begin repaying the $10,000 loan right away. A few months down the line, you'll need to take out another $10,000 loan to purchase the necessary equipment for the new branch.
You're free to borrow up to the full extent of your available credit at any given moment.
As you pay off the loan, you're essentially opening up a credit line that you can potentially tap into again in the future.
Two primary types of lines of credit are available for consideration.
A secured line of credit involves utilizing an asset as collateral, guaranteeing to the lender that, in the event of default, the asset can be seized to settle the debt. This How to Get a Business Line of Credit: List of Requirements Explained line of credit typically comes with a lower interest rate.
On the other hand, an unsecured line of credit does not require collateral, leaving the lender to rely on other means to recover the debt.
Getting Started with a Business Line of Credit Application
Before initiating the application process, it's advisable to conduct some preliminary research to boost your chances of approval.
The following five steps can be taken in preparation for a line of credit application:
- Conduct a thorough review of your financial situation and credit history. This will enable you to identify any areas that require improvement and ensure that your application is as strong as possible.
- Explore Alternative Paths – Browse various lenders and compare their lines of credit to find the best fit for your needs.
- Assess the Entry Requirements – Be aware that traditional lenders may have stricter qualification standards How to Get a Business Line of Credit: List of Requirements Explained to other lenders.
- Get a Clear Picture of the Costs – Be aware that lenders charge varying fees and interest rates.
By understanding these costs upfront, you can make a more informed decision.
- Prepare Your Application – Gather all necessary documents and submit your application.
How Long Does it Take to Get a Line of Credit?
Once How to Get a Business Line of Credit: List of Requirements Explained submitted your documents and completed your application, you'll need to wait for the lender's decision, which may require a visit to a physical branch for some traditional lenders to provide additional information in person.
Upon approval, you can expect to receive your business line of credit in a matter of days, with online lenders generally faster than traditional banks in setting up new lines of credit.
Boosting Your Line of Credit Chances
Boosting your chances of securing a line of credit requires a solid business and/or personal credit score, typically above 680 for How to Get a Business Line of Credit: List of Requirements Explained FICO score, and having a reliable collateral to back the business line of credit.
For a business to qualify for financing, a minimum of six months of operation is typically required for online lenders, while traditional lenders typically require two years of operation.
Exploring Alternative Financing Options for Business Owners
While a business line of credit is a popular financing option, it's not the only choice for business owners.
Here are a few alternatives to consider:
- Business credit card – Ideal for short-term financing, business credit cards offer a grace period to pay back a balance without incurring interest rates.
- Accounts receivable factoring – Perfect for alleviating cash flow issues, factoring allows How to Get a Business Line of Credit: List of Requirements Explained to finance 70-90% of the value of their outstanding invoices, providing immediate working capital.
Financing Options for Business Owners
- Accounts Receivable Financing
- Tied to your accounts receivable, this type of financing is for businesses with a minimum of $250,000 in monthly cash flow.
The Bottom Line
A business line of credit provides business owners with a flexible way to achieve their business objectives.
However, rates and credit requirements vary significantly between lenders, making it essential to shop around to secure the best deal.
Understanding Business Financing
- Business Line of Credit
- A flexible financing option for business owners, with varying rates and credit requirements between lenders.
