Do you need a ready source of working capital for your business? A revolving line of credit can be the buffer you need when cash flow isn’t sufficient to cover expenses. It’s the most reliable backup, whether you’re facing an emergency or seasonal slowdown, as you can draw the same funds again after you’ve repaid them.
You only pay interest on the amount you draw, too, which saves borrowers from paying unnecessary interest. Find out what the business line of credit requirements are—and how this flexible financing option can help you.
When a Revolving Business Line of Credit Can Help
Lack of cash and capital are concerns for about one-third of small businesses. But with a line of credit, you’ll always have enough money to:
- Cover operational expenses
- Handle fixed costs, such as rent and utilities
- Process payroll
- Pay business taxes
- Hire staff as needed
- Purchase inventory or supplies to fulfil large orders
- Take advantage of bulk purchase or early payment discounts
Unlike funds from small business loans, which disappear after you use them, money in a revolving credit line is always available. You can draw the same funds again after you’ve repaid them, which provides an always-available capital source to help you manage costs and invest in your business.
You only need to apply once to get ongoing access. And because you can withdraw money as needed, your business remains secure even when unexpected expenses arise or customers don’t pay on time.
How Does a Revolving Business Line of Credit Work?
A revolving line of credit is structured to provide financing up to a given amount – your credit limit. Instead of getting the full amount at once, you withdraw money when you need it and make payments only on what you draw.
Having a business line of credit keeps you prepared for growth opportunities. You never know when a lucrative deal or new opportunities, like expansion or a supplier discount, might come along. When it does, you can draw on your line of credit to make the investment without compromising cash flow.
Revolving lines of credit technically have no formal repayment schedule, as borrowers will make payments toward their outstanding amount much like they would a credit card. If either party decides to end the relationship, they must do so through a formal contract agreement. Until then, the borrower can continue drawing and repaying the amount they borrow on the schedule outlined by their lender in their contract.
Draw When You Want, and Only Pay Interest on What You Take
You can draw as many times as you want up to the credit limit, which is a much safer option than trying to use multiple loans of various sizes to cover your expenses. Paying back what you draw replenishes your available credit, giving you renewed access to funds.
This is different from a business loan, where you have a fixed payment schedule starting when you get funded and must continue making payments until the end of the loan term, regardless of how much money remains. Revolving lines of credit provide consistent access to capital, allowing entrepreneurs to draw and repay as needed.
Business Line of Credit Core Requirements: Everything You Need to Qualify
Business line of credit requirements will vary depending on the lender. However, you can count on three main requirements to almost always affect your eligibility. These include your annual revenue, credit score, and how long you’ve been in business.
In the new modern financing world, online lenders are more concerned with where your business is going, rather than your history. Because lenders are interested in how funding could open new opportunities, you can usually qualify based on revenue—even if your credit score is below the mark.
Having strong revenue and consistent cash flow signals to lenders that you’ll be able to repay your credit line. Lenders will want to review your business bank statements or even link your bank account. They will be looking for proof of steady or growing income over time.
Different lenders will have different annual revenue requirements, although $120,000 is often the minimum. Nonetheless, it’s usually possible to find other options with a lower annual gross sales number.
You can expect lenders to verify both your personal credit score as well as your business credit score. Oftentimes, a business line of credit requires a personal guarantee. Lenders will feel you’re more likely to pay back what you owe if your personal finances are on the line.
Lenders will also evaluate your business credit score and credit history. If your business is still in its early stages and doesn’t have any credit history, your personal credit score may carry more weight.
Having good credit, or a FICO score above 700, will boost your chances of qualifying for a line of credit. While you can still get a small business line with bad credit, you may end up with fewer options or a high interest rate.
Time in Business
Lenders see small businesses as risky. However, if you can show that your business has been profitable for some time, you’ll be more likely to qualify for a line of credit.
Generally, most traditional lenders prefer you’ve been in business for at least two years. However, some businesses have been able to get funding after 1+ years when working with online lenders.
What Are the Documents Required for a Revolving Line of Credit?
Along with your annual revenue, credit score, and business history, there are other business line of credit requirements you must meet to reach an approval. Depending on whether you apply through a bank or an online lender, along with your financials, these factors may or may not come into play.
In some cases, you may be asked to put up collateral. This is especially true if you have a poor credit score, weak revenue, or if you’re an early-stage company. However, not all lenders will insist on collateral, and you may be able to qualify for an unsecured line of credit options.
Many online lenders don’t require all of the documents below, but other online and traditional lenders may need to see them.
- Business financials, including balance sheets, bank statements, tax returns, profit and loss statements, debt to equity ratio, expense ratio, debt schedule, and cash flow history and projections.
- Business plan
- Number of open credit accounts or lines
- Liquidity of available assets
- Industry risk level and growth potential
- Legal documents, including business licenses and registrations
- Financial history, including bankruptcy or liens
- Availability of collateral (for a secured line of credit)
Other Revolving Line of Credit Requirements
Revolving lines of credit carry more restrictive eligibility requirements than traditional lines of credit, which may stand as a hurdle for some borrowers. However, there are two options for revolving lines of credit – secured and unsecured.
|Revolving Line of Credit Options||Details|
|Secured Lines of Credit||
|Unsecured Lines of Credit||
A secured line of credit requires the borrower to offer an asset as collateral. While it’s a risk to the borrower, it mitigates the lender’s risk of financial loss and, in turn, allows them to offer more favorable terms and looser eligibility criteria. Borrowers who can’t meet the qualifications of secured financing should consider an unsecured option to help them accomplish their goals as they gain more experience and build stronger credit.
Outside of a possible collateral requirement, businesses should be aware that some lenders charge draw fees or require minimum withdrawal amounts from credit lines. Other lenders charge “inactivity fees” if you don’t draw on the line at least once in a given time frame. It’s essential to ask your lender about these contingencies before finalizing your contract. You don’t want to find out you owe more money after you’ve already racked up a bill, do you?
Business Line of Credit Requirements at a Bank
Banks are notorious for imposing stricter business line of credit requirements. Business owners will have to provide a lot more documentation and meet more rigorous qualifications for credit score, annual revenue, and time in business at a bank than if they were to seek funding from an online lender.
The requirements for a line of credit at a bank can vary, but are normally around:
- A credit score of at least 660 (or potentially higher through other banks)
- Annual sales of $120K or higher
- At least 2 years in business
As a result, many small business owners struggle to secure financing, and only 66% of bank applications get approved. Physically receiving funds from a bank also takes longer. In some cases, it can take weeks or even months to see the funds in your account.
Even if you qualify, bank turnaround times may make it impossible to get funding and start spending before your opportunity to grow disappears.
If you have excellent financials, a clear business plan, and underwriters believe you can take on more debt, then you may qualify. If not, though, prepare to either apply elsewhere or defend your application with the right documentation.
The newer your business, the more difficult qualifying for a bank line of credit will be. If you’re heading up a startup, have a shaky credit history, or need funding in a hurry, an online lender may be the best option.
How to Apply for a Business Line of Credit
You’ll have to apply through either a bank, an online lender, or an online lending marketplace. Here’s what to expect from the process:
- Research Lenders and Find Options That Align With Your Goals
First, you’ll need to research both bank and non-bank lenders to find options that fit your circumstances. You’ll take careful consideration of their eligibility requirements, offered programs, and reputation.
- Prepare the Relevant Documentation
Next, you’ll need to collect the required documents and prepare to apply with lenders. This usually includes business financials, business plans, and relevant licenses/registrations but can differ depending on the lender you’re working with. For the best results, ask what documents you need beforehand so you don’t have to waste time with any back and forth.
- Submit Applications and Wait for Responses
Next, you’ll fill out applications with the lenders of your choice and wait to hear back. This can take anywhere from 60 to 90 days with traditional lenders, whereas non-bank lenders can render a response within days to hours.
Make sure you’re completely honest throughout your entire application process, and come prepared with the relevant documentation. You can guarantee lenders will do their due diligence and uncover any information you’ve hidden or misrepresented, so it’s important to act truthfully and have solid documentation to back up your claims.
Don’t forget – Take the time to go through every aspect of your application to ensure you’ve understood everything and supplied all the correct information. Carefully review for any hidden fees, contingencies, or language that could complicate your use of the financing in the future.
If you’ve been rejected for a business line of credit from a bank, remember that it’s not your only option. Different lenders are looking for different criteria, and you may be able to secure funding from an online lender.
Get Started with a Business Line of Credit
National Business Capital offers a flexible business line of credit for small businesses with at least one year of operating history, a 600+ FICO score, and at least $120,000 or more in annual sales.
Unlike traditional lenders, National’s 75+ lender marketplace can provide access to your credit line in just a few hours. Credit limits range from $10,000 to $5 million, and our team can help you push for the maximum amount you qualify for.
Plus, you can link your bank account to learn your interest rate and repayment terms faster than ever without ever submitting a credit report.
With an expert team behind every client and the opportunity to increase available credit as your business grows, National Business Capital is uniquely capable of helping any entrepreneur find the revolving line of credit that fits their business and where it’s headed. Get started by applying now!