This post was last updated on March 3, 2021 to include the latest information about business line of credit requirements.
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 back-up, whether you’re facing an emergency or seasonal slowdown. Find out what the business line of credit requirements are—and how this flexible financing option can help you.
Lack of cash and capital are concerns for about one-third of small business. But with a line of credit, you’ll always have enough money to:
Unlike funds from small business loans, which disappear after you use them, the money in a credit line is always available.
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.
To understand how to determine a business line of credit amount, you need to know some basic financial metrics. These include your daily cash needs, cash usage and cash sources.
Your cash conversion cycle – the average time between getting an order and receiving payment – is also important. These numbers compare available cash to current expenses to show how much capital your business needs to stay running.
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 opportunity, like expanding, might come along. When it does, you can draw on your line of credit to make the investment without compromising cash flow.
You can fund specific plans for growth in the same way, as your business reaches new milestones and requires more capital to expand.
There are long term and short term options available. It’s a more flexible option than a business credit card, as you’ll get more funding to spend and repay over a longer period of time, without being punished for not paying right away.
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.
You’ll make payments based on the lender’s structure and terms.
For example, a credit line with one-year terms gives you 12 months to pay off the amount you draw with interest. Payments may be monthly, bi-monthly or weekly.
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.
Be aware that some lenders charge draw fees or require minimum withdrawal amounts from a credit line. Others charge inactivity fees if you don’t draw on the line at least once during a given period of time.
Before borrowing, be sure to check the terms of the financing agreement for these stipulations before signing to minimize additional fees, which could impact your company’s bottom line.
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 to qualify 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.
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 six months when working with online lenders.
Along with your annual revenue, credit score, and business history, there are other business line of credit requirements. 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 unsecured line of credit options.
Many online lenders won’t even mention the factors below, but other online and traditional lenders could:
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:
As a result, many small business owners struggle to secure financing and only 66% of bank applications get approved. Receiving funds from a bank also takes longer. In some cases, businesses have to wait weeks or even months.
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.
In order to qualify for a business line of credit you’ll have to apply through either a bank, an online lender, or through an online lending marketplace.
Make sure you’re completely honest throughout your entire application process. You can guarantee lenders will do their due diligence and uncover any information you’ve hidden or misrepresented.
Take the time to go through every aspect of your application to ensure you’ve understood everything and supplied all the correct information.
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.
National Business Capital offers a flexible business line of credit for small businesses with at least three months of operating history and $120,000 or more in annual sales.
You don’t need a stellar FICO score to qualify, and you can get access to your credit line in just a few hours. Credit limits range from $10,000 to $5 million.
You can link your bank account to learn your interest rate and repayment terms faster than ever, without ever submitting a credit report.
With no collateral requirement and the option to increase available credit as your business grows, National’s true revolving line of credit can be tailored to your needs. Get started by applying now!
National Business Capital is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.
Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.
We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!
Matt Carrigan is the Content Writer at National Business Capital & Services. He loves spending every day creating content to educate business owners across every industry about business growth strategies, and how they can access the funding they need!