A business line of credit is a flexible funding option that allows a company to borrow money as needed up to a specified limit. It is similar to a credit card in that it can be used for various business expenses, such as inventory or equipment purchases, and the balance can be paid off over time. However, unlike a credit card, a business line of credit typically has a lower interest rate and can be used for larger expenses.
If a business line of credit is ideal for your business, make sure you can qualify for this type of financing. If you need help estimating your eligibility, Llama Loan can help make the process simple.
How to qualify for a business line of credit
To qualify for a business line of credit, a company will typically need to meet certain requirements set by the lender. Note that lenders have different requirements. You may qualify with one lender but not with another.
Credit history
Lenders will almost always check your personal credit to determine your creditworthiness. This is true even if the lender doesn’t have a minimum credit score requirement.
You will likely need a credit score of 500 or higher to qualify. You will likely get the best terms and interest rates if your credit score is 600 or higher. If you want a business line of credit from a bank or the Small Business Administration (SBA), you should ideally have a credit score of 660 or higher.
Lenders may also check the company’s credit score and credit history to determine its creditworthiness. Lenders will typically look at the company’s credit report, which includes information on payment history, outstanding debts and credit utilization. However, most lenders will use your personal credit score as the more important factor.
If you do not have ideal credit, make sure you meet other business line of credit requirements to improve your chances.
Time in business
Unfortunately, the Small Business Administration reports that a third of small businesses don’t last beyond two years, and half don’t make it past five years. As a result, many lenders will require that a company has been in business for a certain amount of time, usually at least one to two years.
While some lenders will allow businesses to qualify with six months in business, a younger business is likely to have much higher costs associated with a business line of credit.
If you want a business line of credit for a new startup, there are options. However, you will need to be highly qualified in other categories. You may also need to be prepared to have collateral.
Collateral
Many business lines of credit are unsecured, meaning traditional collateral isn’t required. However, many lenders require a personal guarantee. A personal guarantee says that you will pay back the loan if your business can’t. Because a personal guarantee is a common business line of credit requirement, you will have a higher chance of qualifying if you have a strong personal credit score.
More collateral may be a business line of credit requirement in some cases, and you might offer collateral to get better rates and terms. Collateral could include equipment, real estate or inventory. If you are unable to pay what you borrowed, the lender could take the collateral to minimize their losses.
Some lenders also secure lines of credit by putting a UCC lien on your business, which allows lenders to take your business assets to pay the debt if you cannot.
Business plan
Many lenders will also want to see a detailed business plan that outlines the company’s strategy and projections for growth.
Business finances
Lenders will also want to see the company’s financial statements, such as its income statement, balance sheet and cash flow statement. This will help the lender assess the company’s financial health and ability to repay the loan.
Your business will likely need a minimum annual income of at least $25,000, but some lenders, such as banks, will ask for more than $100,000 to qualify. If you have a lower annual revenue, you should focus your search on online lenders or through an online broker like Llama Loan.
Most lenders will also want to know about any current business debts you have. If you have other debt, a lender may determine that you can’t afford more financing. If you have current debt, prepare to demonstrate what would be an affordable payment schedule for your business.
You will usually be asked for financial documents to show your cash flow and revenue. Common documents requested include:
- Balance sheets
- Bank statements
- Profit and loss statements
- Tax returns (both personal and business)
Lenders may also want to know your debt service coverage ratio, which divides your annual net income by your current debts. You will have the highest chance of favorable rates and terms if your debt service coverage ratio is above 1.25 (125% of your liabilities).
General information
A lender will need basic information about you and your business before deciding to lend to you. Have the following information and documents ready:
- Business entity type
- Business industry
- Business licenses and permits
- Contact information of all business owners
- Employer identification number (EIN)
- ID such as a driver’s license, birth certificate or U.S. passport
- Voided business check
Some online lenders let you connect your business accounts to help make gathering this information easier.
Lenders want to know what kind of industry your business is in because some industries are riskier than others. Lenders want to see stability before approving lines of credit. If you do business in a risky industry, make sure to include information about your industry experience. If you’ve run successful businesses in the same industry, you will look much less risky than someone completely new.
Why consider a business line of credit to finance your business
Business financing comes in many forms, including traditional business loans and business lines of credit. These methods can be effective ways to get essential funding, but some options will be a better fit for your business than others.
A business line of credit is ideal if you:
- Do not have a specific use for the funds
- Want an option you can pay off over time as you borrow
- Need funding for various expenses
- Want to have funding available for when it is needed
- Do not qualify for other financing options
- Want lower interest rates than credit cards
- Do not want to use collateral for business funding
- Want the ability to pay off balances without any prepayment penalties
- Want to be able to draw on funds as many times as needed within the credit limit
- Want to build business credit history
However, if you’d prefer a lump sum of money with fixed payments and a fixed time period, a traditional loan may be better for you. A business loan is also ideal if you need to make a specific large purpose, and they typically have lower interest rates.
Ultimately, whether a business line of credit or a business loan is better will depend on the specific needs and circumstances of the business. It’s important to carefully consider the terms and qualifications of each option, as well as the company’s current and future financial needs.
How to get a business line of credit
Once a business has met the lender’s requirements, the lender will assess the company’s risk and determine the amount of credit it may offer. The business will then be able to use the line of credit as needed and will be expected to make regular payments on the balance.
Getting a business line of credit can be a competitive process, and rates and terms may vary depending on the lender and the company’s credit profile. It’s always a good idea to shop around and compare offers from multiple lenders before making a decision.
To help you shop around for the best deals and make the process of gathering everything you need to meet business line of credit requirements, contact us at Llama Loan for help. We simplify the process by showing you which lenders you may qualify for and which are likely to offer you the best deals and helping you apply.
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