How to Get a Business Line of Credit in 4 Steps

How to Get a Business Line of Credit: What You Need to Know

4 Steps to Get a Business Line of Credit

• 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.

• Annual Revenue

  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 like Fundbox have very flexible time-in-business requirements for their lines of credit. Fundbox only requires six months in business.

• Collateral

  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.

• Short-Term vs. Long-Term Business Lines of Credit

  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
  • Simpler applications
  • Fund faster

  And now, here are a couple downsides:

  • More expensive
  • 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

• Secured vs. Unsecured Business Lines of Credit

  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 OnDeck 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.

• Bank Lines of Credit vs. Online Lines of Credit

  It can be tough to determine if you should go with a bank line of credit or an online lender. This might help:

  Bank Pros

  • Offer most desirable rates and terms
  • Long-term, secured line of credit

  Bank Cons

  • 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

  • More expensive

  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.

• • 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

• • 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

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