If you’re looking for financing for your business—whether to support your cash flow, purchase inventory, or upgrade equipment—you might consider a business line of credit. After all, out of all of the business loans and other funding solutions on the market, a line of credit will be one of your most flexible options.
If this type of financing is right for you, here are the business line of credit requirements you need to know:
Before we dive into the details regarding business line of credit requirements, let’s start with the basics: What exactly is a business line of credit and how does it work?
As we mentioned briefly above, a line of credit is one of the most flexible forms of business financing, allowing you to access capital as you need it. With a business line of credit, you receive a credit line in a specified amount, and you can draw funds (in any amount, up to your limit) whenever you need them. You’ll only need to pay back the funds you draw (with interest) and you’ll only accrue interest on those funds.
Plus, similar to a credit card, most business lines of credit are revolving—meaning that you are given access to a maximum amount of capital that you can access over and over again once you pay off the balance.
As an example, if you are approved for a business line of credit of $100,000 and use $10,000 to purchase new inventory—then you still have access to $90,000—and, once you pay back the $10,000 you borrowed (plus interest), you’ll regain access to the full $100,000.
In this way, a business line of credit is different (and more flexible) than a term loan, which gives you access to a lump sum of funds at once that you must pay back in full, over time, with interest. Because of the flexibility of a line of credit, this product is well-suited for covering everyday business expenses—such as covering payroll, purchasing inventory, and making minor business investments—whereas business term loans are better for long-term, larger investments like hiring new employees or investing in a new storefront.
With this overview in mind, let’s break down the business line of credit requirements you’ll need to meet if you want to qualify for this type of financing.
In addition to flexibility, another notable benefit of a business line of credit is that you don’t necessarily need a great personal credit score to qualify. Because of the shorter repayment terms that are typical of business lines of credit, lenders are generally more confident that you’ll be able to pay back the loan. Plus, not only does a lender need to worry about you repaying the funds you draw (and not necessarily the entire maximum of the credit line), business lines of credit are often secured with collateral—giving the lender an added level of security if you were unable to pay back your debt.
As we’ll discuss, some secured business lines of credit are backed by collateral, whereas others are simply backed by a personal guarantee or lien on your business.
On the whole, the business line of credit requirements you can meet will dictate the types of credit lines you have access to—as we’ve said, if you have a lower personal credit score, it may be easier for you to access a secured, short-term line of credit. Along these lines, if you have a strong credit score and substantial business finances, you’ll be more likely to be able to access a medium- or long-term line of credit.
With all of this in mind, let’s break down some of the most common business line of credit requirements. Generally, the first qualifications you’ll have to meet will be credit score, annual revenue, and time in business. These criteria, among others, will not only determine if you qualify for a business line of credit, but also the maximum amount of funding, introductory duration of the credit line, and length of repayment terms.
To start, one of the most common business line of credit requirements you’ll see is a personal credit score minimum. Ultimately, this minimum will vary from lender to lender, but you should expect that any time you apply for a line of credit the lender will check your personal credit score.
As is the case with all business financing products, your personal credit score helps a lender determine your creditworthiness as a borrower, and therefore, how likely you will be able to pay back your loan, or in this case, your credit line.
Overall, it’s safe to say that you’ll want to have at least a credit score of 500 to qualify for business lines of credit. You’ll have more options available to you—as well as better terms and lower interest rates, if your credit score is 600 or higher. For the most desirable business lines of credit, like those from a bank or the SBA, you’ll want to have excellent credit, ideally 660 or higher.
This being said, even if a lender doesn’t have a credit score minimum, they’ll more than likely check your credit before funding your application. Therefore, if you have less-than-ideal credit, you’ll want to ensure that you’re highly qualified to meet other business line of credit requirements.
Moreover, it’s important to mention that although some lenders may check your business credit score, most will use your personal credit score as a more influential eligibility criterion.
Another of the most common requirements you’ll need to meet in order to qualify for a business line of credit is annual minimum revenue. Once again, the specific number you’ll need to meet will likely depend on the product and lender you’re applying for; however, you can expect any lender to ask for this information.
On the whole, if you’re applying for a business line of credit from an alternative lender, you’ll likely need a minimum annual revenue of anywhere from $25,000 to $100,000. For bank lines of credit, on the other hand, you may be asked to show even more annual revenue in order to qualify.
Overall, a business line of credit may ask for a variety of financial documents to evaluate your annual revenue, as well as your cash flow. Both of these factors, like your credit score, will help a lender evaluate your ability to pay back debt and therefore, actually afford the product you’re applying for.
Therefore, to fulfill this business line of credit requirement, you may be asked to provide:
This may seem like an arbitrary business line of credit requirement, but lenders will look to your time in business for a sense of security.
To explain, if your business has been around longer, you’ve proven you can manage your operations—both the ups and the downs. In this way, it’s less risky for a lender to offer you a line of credit—they’re more confident you’ll be able to pay it back. On the other hand, if you’re a newer business, you haven’t proven your ability to run your operations successfully and really stay in business, making you more of a risk for a lender.
So, as a general rule of thumb, you’ll find it easier to qualify for a business line of credit if you have at least six months in business. If you’re looking for products with the best rates and terms, you’ll want to have at least one year in business, and ideally, two years.
This being said, if you’re looking for a startup business line of credit, you may find lenders who will work with you—but you’ll likely need to have high qualifications in other categories, like credit history, and be willing to offer collateral to secure your credit line.
So far, we’ve mentioned collateral in passing, but now let’s explain this business line of credit requirement in more detail.
Essentially, collateral—in some form—is used to secure a line of credit (or any business loan) for the lender in case you can’t pay back what you’ve borrowed. In this case, if you were unable to pay, the lender would be able to claim your collateral and use it to recoup some of their losses.
This being said, when it comes to business lines of credit, you’ll find that these products will usually require some kind of collateral. In some cases, you may need to supply traditional collateral, like physical assets or real estate, whereas in others, you may be asked to sign a personal guarantee. With a personal guarantee, you’re agreeing, as an individual, to pay back the funds you’ve borrowed in the event that your business cannot do so.
Finally, you may find that some lenders secure their lines of credit by placing a UCC lien on your business. A UCC lien is a formal statement in which the lender lays claim to your business assets to repay your debt in the case that you can’t pay.
Once again, the collateral you’ll need to qualify for a business line of credit will vary, largely based on the lender and your other qualifications. As we mentioned earlier, if you have bad personal credit, you may be required to offer more collateral in order to qualify and secure a business line of credit. On the other hand, if you have excellent credit and business financials, you may not need to put up as much to secure your credit line.
When you apply for a business line of credit, most lenders will want to see your existing debt schedule, if you currently have a business loan or other form of financing. Although this requirement may not be as influential for a line of credit as for other loans—due to the “use it when you need it” way a business line of credit works—lenders will still use this information to evaluate your eligibility.
To explain, if you have significant existing debt with frequent payments, a lender may decide that you can’t actually afford a line of credit and that it’s too risky to lend to you, as you may not be able to pay back the funds you borrow.
Ideally, if you have existing debt, you’ll want to be able to show a managed payment schedule that you can afford. If you don’t have existing debt, on the other hand, this should also be a good sign for a lender.
Finally, one of the simplest business line of credit requirements that you’ll be asked to provide on your application will be basic personal and business information.
You’ll likely need to provide your personal information and contact information, as well as that of any other owners of the business. You may also be asked to provide a form of ID. For your business’s information, you may be asked for your employer identification number (EIN), a voided business check, entity type, business licenses or permits, as well as other legal documents and agreements.
Generally, in comparison with traditional term loans and SBA loans, you won’t need to provide the same extent of documentation to qualify for a business line of credit. In fact, many online lenders have created automated systems that allow you to connect your business accounts—bank account, merchant account, accounting software, etc.—and these lenders evaluate your qualifications this way.
Ultimately, the exact business line of credit requirements you’ll need to meet, as we’ve mentioned, will largely depend on the lender—with banks requiring the most documentation and highest qualifications, and alternative lenders offering more flexibility. Plus, the better your qualifications, the more products you’ll be able to qualify for and the more desirable interest rates and terms you’ll receive.
On the whole, however, you can expect to provide some or all of the requirements we’ve discussed above. In this vein, based on Fundera’s experience, most customers who were approved for business lines of credit had:
With this information in mind, let’s move on to your next steps, and discuss what you need to do to actually get a business line of credit.
Overall, the business line of credit application process can be broken into three simple steps.
Now that you have a better understanding of business line of credit requirements, you’ll want to start by actually finding the lines of credit you want to apply to.
If you have great credit, substantial revenue and at least two years in business, you might start your search with a bank line of credit—as we’ve mentioned, although banks will require more documentation, as well as time to fund, they’ll also offer the most desirable rates, amounts, and terms.
On the other hand, if you don’t think you’ll qualify for a bank line of credit, you’ll want to look into some of the top alternative lenders who offer business lines of credit.
In particular, if you’re looking for a simple application, fairly fast funding time, and rates and terms similar to a bank product, you might look into the lines of credit offered by Fundation or Fundbox. If you need more flexibility in your requirements, you may look to Kabbage, BlueVine, or OnDeck for some of your best options.
Ultimately, you’ll want to decide what your business needs, what you think you can qualify for, and then conduct your search accordingly. You should narrow down your choices and determine which will be best for your business before starting the application processes.
Once you’ve decided where you’re going to apply for a business line of credit, it’s time to prepare your applications.
As we’ve mentioned, the specific application process will be largely specific to the lender. Banks, for example, will likely require you to apply for a line of credit in person and will need physical documentation of many of the requirements we listed above.
For most alternative lenders, on the other hand, you should be able to complete your line of credit application quickly and easily online. These lenders may allow you to fill out an initial application and then they’ll follow up for additional documentation. Or, as we mentioned earlier, there are lenders like Fundbox and Kabbage who run the majority of their application processes by connecting to your business accounts and pulling relevant information from these sources.
On the whole, you’ll want to pay attention to exactly what business line of credit requirements a lender asks for and fill out the application correctly and completely—this will speed up the entire process and get you access to funds faster.
Generally, you’ll want to be prepared to provide any or all of the following for your line of credit application:
Once you’ve gathered all of the necessary documentation, it’s time to submit your applications. Depending on the small business lender or lenders you’re applying with, the application process can take anywhere from a few days to longer than a week.
Generally, however, business lines of credit are one of the fastest products to fund, as they often require less information and underwriting in comparison to traditional term loans.
This being said, after you submit your applications, you’ll want to respond quickly to any requests the lender has, as this will also help expedite the process.
Finally, provided you were able to meet all of the business line of credit requirements for one or more lenders, you should receive an offer that details the line of credit amount you qualify for, as well as rates and terms. You’ll want to review any offer you receive carefully—and if you have multiple offers, compare them thoroughly to ensure you’re getting the best rates and terms.
After you’ve determined which line of credit option is best for your business, you’re ready to accept the offer and get access to your funds.
Now that you have a better sense of business line of credit requirements, as well as how to qualify and apply for this type of financing, you may still be asking: Is a business line of credit right for me?
Ultimately, the answer to this question will depend on a variety of factors—including, first and foremost, your business’s financial needs.
On the whole, however, if you’re seeking a flexible source of business funding that will give you quick access to cash when you need it, then a business line of credit is certainly a strong option to consider. Plus, as we’ve mentioned, even if you’re a newer business or business owner with less-than-ideal credit, you may still be able to qualify for a line of credit—although, it’s important to remember that in this case, you’re likely to see shorter terms and higher interest rates.
Moreover, due to the revolving nature of a business line of credit, this is also a great product to have on hand (in addition to or without other financing) to use as needed—whether for working capital or to cover an emergency.
Therefore, if the time comes, now or in the future, when you decide a line of credit is right for your business, you’ll have the knowledge you need to compare your options and find the best product for you.