Understand the qualifications for a business line of credit

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 line of credit 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 against which you can borrow. You can withdraw any amount as and when you need up to your credit limit. You pay only the money you use and pay interest on that money. Unlike term loans and other lump-sum types of financing, you are not required to make payments on a line of credit until you actually use the funds.

Typical uses of a credit line include a number of business needs such as supporting your cash flow, paying for emergency expenses, supplying working capital, covering outstanding accounts receivables, purchasing inventory or making payroll. Lines of credit 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. Keep in mind that requirements vary. Banks and other traditional lenders have stricter qualification requirements than online lenders. You’ll typically pay lower interest rates and get more favorable repayment terms online with a business line of credit than you would with a traditional lender.

small business line of credit eligibility 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 smaller loan amounts. However, if your credit score is 600 or above, you have more options available to you. Plus, you’ll pay less interest on the amount borrowed and get more favorable terms, which is essential during times of rising borrowing costs. To get the most attractive credit lines, such as those provided by a bank or backed by the US 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, such as 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 in their decision, so get it as high as possible. It’s important to do.

Annual revenue

If you’re applying for a business loan from an alternative lender or online loan provider, you’ll likely need a minimum annual income of between $25,000 and $100,000. For bank lines of credit, you’ll need higher revenue levels to qualify.

You may need 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 repay the credit you are applying for. Some of the documents that may be requested include the following:

  • Balance sheet
  • bank details
  • business and personal tax returns
  • profit and loss statement
  • additional financial documents.

time in business

You’ll find it easier to qualify for business credit if you’ve been in business for at least six months, especially if you apply through an online lender. You’ll want to be in business at least a year — and preferably two or three — if you want the better rates and terms typically offered by traditional banks and credit unions.

If you’re an entrepreneur seeking a business line of credit for a startup or relatively new business, you can find lenders that will approve you. You may need better qualifications in other categories such as credit history. You will also probably be asked to deposit collateral to secure your credit limit.

collateral

collateral is used secure a line of credit (Known as a secured line of credit). If a small business owner cannot pay back the borrowed funds, the lender can seize and sell the collateral. It can use the proceeds to offset 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 may be asked to sign a personal guarantee. A personal guarantee means that you as an individual agree that you will pay back your borrowed money if the business cannot.

Some lenders secure a credit line by placing a UCC lien on your business. A UCC lien allows the lender to claim your business property if you can’t repay your loan.

If you have poor personal credit or have been in business for a short time, you may need to submit a relatively high amount of collateral in order to qualify for and secure a business credit line. Conversely, if you have excellent credit and business financials and have been in operation for a long time, you may not need to spend as much to be approved, or you may qualify for unsecured financing, which Often referred to as an unsecured business line of credit. ,

current loan 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 can include both business and personal financing. This helps them understand whether you can afford the additional debt – and the monthly payments.

If you have existing debt, you will need to demonstrate a payment schedule that you can afford. If you have no current credit, or very little, that’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 may 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)
  • canceled business check
  • Business Unit Information
  • business license or permit
  • Legal Documents and Agreements
  • tax forms
  • Balance sheet
  • business financial statement
  • Bank details.

Typically, if your fundamentals are sound, you won’t need to submit as many paperwork to qualify for a business line of credit as you would for a term loan. (You won’t need to submit a current business plan.) In some cases, online lenders have automated systems that allow you to link your business bank accounts, merchant accounts, accounting software, and more, so your application can be evaluated. Virtually.

Benchmark Business Line of Credit Requirements

Ultimately, the business line of credit requirements depend on the lender. However, here are some criteria that can help you determine whether you are likely to be approved.

  • in business for over a year, preferably two or three
  • Over $200,000 in annual revenue
  • 620+ Personal Credit Score
  • 640+ Business Credit Score
  • Reasonable loan load and payment schedule
  • Proof of identity, usually a driver’s license or passport
  • Complete business and personal financial history documentation, including:
    • canceled business check
    • Bank details, including your business checking account details
    • Balance sheet
    • profit and loss statement
    • business tax return
    • personal tax return.

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 line of credit.

Your credit score, annual revenue and time in business are the top three factors that lenders consider. In addition, they will evaluate your current loan schedule, your 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 such as Biz2Credit,

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