A business line of credit can be a great source of extra cash. Business lines of credit are extremely flexible financing solutions – you can use them to manage cash flow gaps, unexpected expenses, expansion opportunities, and more.
Unlike a business loan, which provides you with an upfront, lump-sum amount you’ll need to pay back over a fixed timeframe, a business line of credit comes with more freedom.
You’ll have access to a revolving line of credit you can withdraw from as needs arise. You’ll only have to make payments on what you borrow, and you’ll have the ability to repay and reuse. If you’re considering taking out a business line of credit, you’ll need to be prepared for the potential requirements. Although there are many different types of lenders, you can expect these factors to have an influence on your eligibility.
What Are the Requirements for a Business Line of Credit?
Lenders enforce business line of credit requirements to mitigate risk. No matter what type of financing you’re seeking, lenders will always want to feel confident in your ability to pay back what you’ve borrowed.
The more confident lenders are about your business, the better interest rate and terms you’ll be able to secure.
Business line of credit requirements will vary according to different lenders. Some lenders may also put more weight on certain requirements over others. For example, traditional lenders, like banks, will emphasize your annual revenue, business history, and credit score. Online lenders tend to be more lenient. They typically look at your revenue and your company’s potential for growth and are more willing to accept various credit scores.
Here’s a quick rundown of the main requirements:
- Business Credit Score – 700+ at most lenders, although collateral can diminish this requirement.
- Personal Credit Score – Minimum of 700 FICO score, especially if you don’t have well-established business credit.
- Business Financials – Expect to provide balance sheets, personal and business bank statements, profit and loss statements, and personal and business tax returns.
- Time in Business – Banks and credit unions usually need to see 2+ years in business, but some non-bank lenders only require 3+ months.
- Annual Revenue – You’ll need at least $120,000 in annual revenue to qualify for a majority of financing programs. If you can’t meet this requirement, you can explore personal loans to help you meet your goals.
- Industry – Every industry has a different level of risk based on the economy and the unique way they operate. Expect to offer insight to your lender if they aren’t familiar with the market you operate in.
- Credit Card Line of Credit – If you can’t reach an approval with any lender, credit cards provide a nice alternative to business lines of credit.
In-Depth Business Line of Credit Requirements
Here, we offer a detailed examination of each of the requirements above.
Business Credit Score
Your business credit score is a major determining factor in whether you’ll be approved and what kind of interest rates you’ll qualify for. This is especially true for traditional lenders, like banks.
In order to qualify for a business line of credit, you’ll need your score to be at least 700 or higher. The higher your credit score is, the more likely it is you’ll be able to secure lower interest rates and more favorable terms.
If your business doesn’t have credit history, or if it’s still pretty young, lenders will emphasize your personal credit history.
Personal Credit Score
In addition to your business credit score, lenders will also run a personal credit check. You can expect lenders to stress your personal credit score if your business is young or hasn’t built up enough credit history.
Another reason some lenders will run a personal credit check is to ensure a personal guarantee. By involving your personal credit history, lenders make sure you have some “skin in the game” – motivating you to repay your business line.
You can expect any business owner or partner with at least 20% of ownership to have their personal credit history checked.
If your personal credit score is less than 700, you may have a hard time securing financing from a traditional lender or bank. In this case, you’ll want to improve your credit score before applying for a business line of credit.
Another option is to work with online lenders. They tend to be more lenient when it comes to financing. For example, National Business Capital is a FinTech marketplace with lenders that don’t maintain credit score requirements.
Business Financials
Your business financial statements are a good indicator of how financially sound your business is. Lenders want to know that you’re bringing in enough cash to manage your payments and still stay afloat.
You will most likely be asked to provide business financial statements, including:
- Balance sheets
- Personal and business bank statements
- Profit and loss statements
- Personal and business tax returns
You may also be asked to provide some legal documents, such as business licenses, proof of ownership, registrations, or franchise agreements.
Sometimes, lenders will also want to evaluate certain financial ratios, such as debt to equity, current ratio, fixed-charge coverage ratio, or debt service ratio.
Time in Business
According to the U.S. Small Business Administration, only half of all small businesses survive past the first 5 years. Lenders are well aware of these risks and show a preference for businesses that have been around longer.
Most traditional lenders and banks will want to see that you’ve been in business for at least 2 years. Other lenders, such as fintech companies, maintain more relaxed requirements. In some cases, you may be able to get approved with only 3 months of business history.
Annual Revenue
Your annual revenue is one of the most important factors lenders will use to judge your business. Your business bank statements will provide insight into your cash flow and revenue levels.
Strong and consistent revenue that grows over time is a sign that you’ll be able to pay back your business line of credit.
Most lenders will impose a minimum annual revenue requirement in exchange for funding. Banks usually will want to see you can consistently bring in about $250K annually, while online lenders may be willing to approve businesses with $120K in annual revenue.
Industry
Some lenders will want to learn about your industry before they approve your business line of credit. Lenders may inquire about your industry’s risk, its potential for growth, and who your major competitors are.
Some lenders may choose to restrict funding to businesses in risky industries, this can include restaurants, bars, retail stores, and transportation businesses.
It’s not impossible to secure funding if you operate in a risky industry. However, you may need to put in more effort to show lenders how your business is different from competitors and how you plan to grow.
Creating a business plan complete with industry analysis, company summary, profitability projections, and more can give lenders a better picture of your business and industry. You can use this guide as a reference for building a business plan.
Credit Card Line of Credit
You may also be considering a business credit card or wondering how they’re different from lines of credit.
Business lines of credit work very similarly to business credit cards. Both provide access to a set amount of funds, which you can draw from, repay, and reuse as you need.
Business lines of credit usually come with higher credit limits than credit cards. Business lines of credit also feature lower interest rates than credit cards, except for promotional 0% introductory periods.
On the other hand, credit cards are renowned for offering rewards and cashback programs.
Most small business card issuers will make a decision on whether to approve you based on your personal credit score and income sources. As a result, credit cards may be slightly easier to obtain than a business line of credit, especially for young businesses seeking a small amount of capital.
Ultimately, business credit cards work best for managing everyday, smaller expenses, such as office supplies, meals, travel expenses, or the like.
A business line of credit is best suited for larger, ongoing expenses or as an emergency fund.
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