Traditional business loans are the most common way to finance a business, but a business line of credit can be more accessible for startups or business owners with bad credit. A business line of credit is one of the most flexible forms of financing for small businesses.
You can use a business line of credit for working capital, to cover cash flow issues, or to fund an emergency or unexpected opportunity. If you’ve decided that a credit line is the right financing solution for your business, you may now be wondering how to get a business line of credit.
Step 1: Check your business’s qualifications.
Step 2: Compare your options.
Step 3: Prepare your requirements and documentation.
Step 4: Apply and make a decision.
4 Steps to Get a Business Line of Credit
Step 1: Check Your Business’s Qualifications
The first step is checking your business’s qualifications. By knowing where your business stands ahead of time (as in, before you start comparing options and completing applications), you’ll save time and effort throughout the process.
Although there are a variety of business line of credit requirements you might have to meet depending on the lender you’re applying with, there are a few common qualifications that you can use to evaluate your business’s prospects.
Personal Credit Score
To start, you’ll want to determine where your personal credit score stands. When applying for a business line of credit (or any financial product for that matter), your personal credit score will very likely be one of the first things a lender looks at. Here are a few reasons why:
Indication of trustworthiness. The higher your personal credit, the more likely you are to qualify for a line of credit, and one with the best rates and terms.
Determine if collateral is needed. If your credit score is below the threshold as laid out by the lender, you might need to offer up some kind of collateral that can be used to pay off debts if your business is unable to.
Find which loans you qualify for. If you’re applying for a bank or SBA line of credit, you’ll likely need to have excellent credit, as well as other top qualifications.
Generally, it’s safe to say if you have a credit score of 600 to 630 (or higher) you’ll be in decent shape to qualify for most business lines of credit.
Like your credit score, most lenders will implement a minimum requirement for annual revenue that a business needs to meet in order to qualify for a line of credit. They do this to answer a few questions:
Can you pay back the loan? A lender will use your annual revenue (as well as other business financials) to ensure that you have enough money coming in to pay back any funds you use from your credit line.
What will the terms of the loan be? Regardless of the small business lender you’re applying with, a higher annual revenue will also give you access to a line of credit with the most desirable terms and lowest interest rates.
Which lender is best for you? If you’re looking to get a bank or SBA business line of credit, you’ll generally need to meet a fairly high annual revenue requirement. Alternative lenders, on the other hand, will show greater flexibility, with many lenders setting their minimum annual revenue requirement at anywhere from $25,000 to $100,000 or higher.
On the whole, just like with your credit score, the higher the amount of annual revenue you have, the better.
Time in Business
When you’re looking to get a business line of credit, you’ll also want to consider your time in business as you evaluate your qualifications. Why?
Determines risk. Longer time in business means less risk for a lender, as your business has been able to maintain ups and downs in operations thus far, and therefore, is more likely to be able to pay back a loan.
Determines what you can actually qualify for. Compared to traditional business term loans, it’s often easier to qualify for a business line of credit with only a year in business, sometimes even less.
Online lenders such as BlueVine and Fundbox have very flexible time-in-business requirements for their lines of credit. BlueVine requires six months in business and Fundbox only requires three months.
Finally, you’ll want to evaluate what kind of collateral you can offer, especially if you’re a newer business or have bad credit. There are a few options.
Actual collateral. Most business lines of credit are secured business lines of credit, meaning they’re backed by some form of collateral. Some lenders will require physical collateral to secure your credit line, such as real estate, equipment, or inventory.
Personal guarantee. Some lenders may require that you sign a personal guarantee stating that you’ll use your personal assets to repay the funds you’ve borrowed in the event your business can’t pay.
Lien. Some lenders may file a lien again your business assets when you get a line of credit with them, meaning that the lender has a legal claim to recoup your business assets in the case that you can’t repay your debt.
Putting up collateral may make you more likely to qualify for a credit line if your other qualifications are lacking.
Step 2: Compare Your Business Line of Credit Options
Once you’ve evaluated your business’s qualifications, you’re ready to start exploring your options.
You’ll want to determine what type of revolving line of credit will be best for your business, considering secured vs. unsecured, short-term vs. long-term, and bank vs. online credit lines.
By using the qualifications you established in Step 1, you’ll be able to narrow down your options to find the right business lines of credit to apply for.
Generally, a short-term line of credit is a credit line with repayment terms of a year or less, whereas a long-term credit has repayment terms of longer than a year.
Short-term lines of credit are most often offered by online, alternative lenders. Here are some benefits of short-term lines of credit:
Easier to qualify for
And now, here are a couple downsides:
Need to pay back faster
If you have higher qualifications and can accommodate slower funding, you’ll want to focus on longer-term lines of credit, like a bank or SBA credit lines. Here’s why:
Longer repayment terms
Lower interest rates
Next, you can narrow down your business line of credit options by deciding whether you want a secured or unsecured line of credit.
It’s actually very difficult to find a truly unsecured business line of credit. Even if a lender doesn’t require physical collateral, they’ll often require a personal guarantee or implement a blanket lien to secure your credit line.
To avoid putting up physical collateral, you’ll want to focus on lines of credit from alternative lenders. Lenders like Winston Rowe and Associates won’t require you to put up business assets for your line of credit, but they will likely ask for a personal guarantee or take out a lien on your business.
On the other hand, if you are willing to put up collateral (and have other top qualifications) you may turn to bank or SBA credit lines. These lines of credit will also have the best rates and terms.
It’s also important to consider that putting up collateral for your line of credit may not only make you more likely to qualify, but overall, it may also help you secure more desirable rates and terms.
It can be tough to determine if you should go with a bank line of credit or an online lender. This might help:
Offer most desirable rates and terms
Long-term, secured line of credit
Difficult to qualify for
Require more documentation
Slower to fund
Online Lender Pros
Greater variety (for bad credit, startups, low annual revenue, etc.)
Simple application process
Faster to fund
Online Lender Cons
If you have strong qualifications but simply don’t want to go through the process of applying for a bank or SBA line of credit, you might turn to a lender like Fundation, which can offer a longer-term credit line with affordable rates, and funding in as little as one business day.
After you’ve narrowed down your options, you’re ready to start preparing your applications.
Let’s say, for example, you considered your business’s qualifications and the different types of credit lines and decided that applying for Kabbage and BlueVine lines of credit will be best for your business.
Now, you’ll want to take a look at the application for each of those lenders and determine what requirements you’ll need to meet to qualify.
Determine what each of these lenders sets for their minimum requirements. Check your personal credit score, annual revenue, and time in business before you start gathering documents and filling out the application. After all, if you can’t meet these requirements, you don’t want to waste your time applying for a credit line you’re unlikely to qualify for.
Prepare your application. On the whole, the documents and information that will be required for your business line of credit application will be specific to the lender; however, you may expect to provide any (or all) of the following:
Basic personal information including your name, social security number, and ID
Basic business information including business name, entity type, tax ID number, and industry
Personal and business credit score
Personal and business tax returns
Business financial information including annual revenue, bank statements, balance sheets, profit and loss statements, etc.
Debt schedule (if you have existing debt)
Legal contracts and agreements
Step 4: Apply and Make a Decision
After you’ve gathered all of the documents necessary based on your lender’s requirements, you’re ready to complete your application and apply.
If you’re applying for a business line of credit from an alternative lender, you’ll likely find that the online application is fairly simple, requires limited documentation, and can be completed in minutes. On the other hand, if you’re looking to get a business line of credit from a bank or from the SBA, you need more documentation and the process will be longer. Many banks (like Chase) will require that you go in-person to apply for a line of credit.
Once you’ve submitted your application, make sure that you’re prompt to answer any questions or requests from your lender. This will help expedite the process and get you access to your funds faster.
Generally, online lenders can fund business line of credit applications quickly, sometimes even within one day. As you may have expected, banks will be slower to fund, taking anywhere from a few days to a few weeks.
After you’ve completed the application and answered any requests, the lender will come back with an offer (if you’re approved). At this point, you’ll want to carefully review the offer to understand how much your business line of credit will cost—and you should compare all of the offers you receive to ensure that you’re getting the best rates and terms. In particular, here are some things to keep an eye out for:
Terms and amount: You’ll want to review all business line of credit applications to see the credit line you’ve qualified for—in other words, the maximum amount of your line of credit, as well as the terms. The terms will indicate how long you’ll have to repay the funds you’ve borrowed.
Payment schedule: Lenders will have different payment schedules that designate how often you’ll make payments on the funds you borrow—some will require daily payments, whereas others may offer weekly or monthly payments. You’ll want to see what kind of payment schedule your business line of credit offer includes.
Interest rate: As you might imagine, the rate on your line of credit will be one of the most important things to review. This being said, you’ll want to look for the APR on your credit line, as opposed to the simple interest rate. The APR will give you a better sense of how much your line of credit will actually cost.
Additional fees: You may find a variety of additional fees that a lender can charge with a business line of credit. In particular, you’ll want to look out for withdrawal fees (charged every time you draw on the credit line), non-use fees (charged if you don’t draw on your credit line for a certain period of time), and prepayment penalty fees (charged if you pay off your balance early).
Once you’ve reviewed the offers, asked your lender any questions, and decided on the best business line of credit for you, you’ll be all set to sign the agreement and receive your funds.
Frequently Asked Questions
Can you get a business line of credit with bad credit?
What are the loan amounts for a business line of credit?
How do business lines of credit work?
The Bottom Line
Once you’ve decided to focus your financing search specifically on business lines of credit, you’ve already tackled a huge part of the process.
Getting a business line of credit comes down to evaluating your qualifications, finding the right line of credit for your business, gathering your documents, and completing the application. Once you’ve completed all of these steps, you’ll have access to one of the most flexible and useful financial products on the market.
Plus, after you’ve gone through this process once, it will only be easier the next time you decide to apply for any type of business financing.