The Essential Business Line Of Credit Requirements
A business line of credit can provide small business owners with the funding necessary to meet certain expenses. Instead of receiving a lump sum loan amount, you’ll get access to a revolving line of credit to borrow from as needed.
A business line of credit requirements tends to be steep and vary from other types of small business loans. This article will help you understand how a business line of credit works, the business line of credit requirements, and how to qualify for a business line of credit.
How a Business Line of Credit Works
A business line of credit is usually an unsecured business line of credit and provides businesses with access to money on a revolving basis. How it works is similar to a credit card. You can draw funds and repay them as needed, and you’ll only pay interest on the money you borrow (not the entire line of credit).
Most lenders will lay out a predetermined payment schedule, and you can draw more money from your line of credit as you continue to make timely payments.
If your application is approved, you can be permitted to borrow anywhere from $1,000 to $200,000 on average. Funds are usually drawn from your line of credit using a business checking account, small business credit card, or even the lender’s mobile banking application.
General Business Line Of Credit Requirements
Several factors contribute to a lender’s decision to approve a business line of credit application. Here’s how to qualify for a business line of credit in order to get funds.
Personal and Business Credit Scores
Not all lenders set minimum credit score requirements. Still, you’ll want to ensure you have good personal and business credit scores. This can help you qualify for a higher loan amount and lower interest rates. While your business credit will primarily be considered, lenders may look at your personal credit score as well as a guarantee. If your business cannot repay the loan, you as an individual will be responsible for the repayments.
Your credit history must demonstrate a strong payment history and a lengthy credit age. Experian, a major credit bureau, claims a good FICO score ranges from 670 to 739.
Time in Business
Lenders won’t give a brand new business a business line of credit. The survival rate for small businesses is not the best. According to the SBA, only two-thirds of small businesses survive the first two years and about half survive five years. Since you could be repaying your business line of credit over several years, lenders need to have the reassurance that you’ve been in business for a while.
The requirements for time in business can vary, but most lenders prefer that a small business has been operating successfully for a minimum of two years.
Businesses that aren’t making enough money will have a hard time repaying a line of credit, hence, why this requirement exists. To qualify, you’ll likely need a minimum annual revenue of anywhere from $50,000 to $100,000.
Other banks and lenders may require more. Annual revenue represents annual sales or income coming into the business and does not account for taxes, expenses, and other costs.
This is one of the most stringent requirements for line of credit to meet. Lenders will want to closely examine all business financials, including balance sheets, profit and loss statements, and bank statements.
They will want to know if your business has ever filed bankruptcy before or if you have any liens. Liabilities like other loans and the business’ debt-to-income ratio are also considered. While annual revenue is an important requirement, if there are too many liabilities or not enough profit left over, it is harder to get approved for a business line of credit.
The industry your business falls under may impact your ability to qualify for a business line of credit as well. Some industries are riskier than others, and lenders might not want to take that risk.
The age of your business could help eliminate this perceived risk and any prior experience you have. An example would be owning a local store but having previous successful retail experience.
Owning a business in a riskier industry doesn’t guarantee you’ll be denied a business line of credit. However, it could be a factor that is powerful enough to limit your options.
Some requirements for a line of credit include collateral if the loan is secured. A secured line of credit requires you to put an asset up as collateral. This asset helps assure your lender that if you fail to repay the loan, they can seize and liquidate that asset to get the money that way.
Type of collateral can be inventory, savings, invoices your business has or will send out, or even real estate.
Business Credit Requirements For Specific Lenders
Each lender has different business credit requirements. Here are some specific criteria for some of the top lender selections.
Fundbox: Fundbox offers a business line of credit for up to $150,000 for U.S.-based businesses. To qualify, you need to be in business for more than 6 months and have a business checking account. You also need an annual revenue of at least $100,000 and a FICO score above 600.
Fundbox allows you to draw money within a 12 or 24-week term, and you’ll have a 3-day grace period to make payments based on your payment schedule. This online lender received a 4.8 out of 5 rating on Trustpilot based on more than 3,000 positive reviews.
Fora Financial: Fora Financial offers a business line of credit alone with other business loan options. To qualify, you’ll need to be in business for at least 6 months, make a minimum of $12,000 per month in sales, and have no open bankruptcies. The company will also consider other debts your business has as well to ensure you can afford to pay off the line of credit. If you get approved for a business line of credit, you can have access to funds in as little as 72 hours.
Credibly: Credibly offers both a secured and unsecured business line of credit with a maximum limit of $250,000. You can get pre-approved online in minutes but must meet a few criteria first.
Credibly requires that your business is U.S.-based and has been operating for at least 6 months. You’ll also need a minimum credit score of 560 and at least $50,000 in annual revenue. For loans over $100,000, you’ll need to submit your most recent tax return as well.
Kabbage: Kabbage offers a variety of financial solutions for businesses and has also partnered with American Express to provide more options. Kabbage Funding offers a business line of credit ranging from $1,000 to $150,000.
To qualify, you must have either received pre-approved for Kabbage Funding or have an American Express card with a minimum of 2 months of payment history. Other requirements include having a business checking account and being in business for at least 12 months. Kabbage also pulls both your consumer and commercial credit scores.
BlueVine: BlueVine is a small business lender and payments solutions provider. This company offers a business line of credit for up to $250,000. To qualify, you need a minimum credit score of 600 and must have been in business for more than 6 months. You also need a business bank account and a minimum of $10,000 in monthly revenue.
BlueVine allows you to apply online and get an approval response in as little as 5 minutes. Each draw from your line of credit is paid with fixed monthly or weekly payments over 6 to 12 months.
How to Get a Business Line of Credit
Obtaining a business line of credit starts with a pre-approval or application through a bank or lender. You’ll need to make sure you meet the basic business credit requirements first. Each lender’s process is different. If you have a newer business, average credit, or lower annual revenue, you may find it harder to get a business line of credit through a bank.
Some of the lenders mentioned above allow you to get pre-approved online first by answering basic questions. Then, you can submit an official application online. If asked, you will need to provide additional information like bank statements, your profit and loss sheet, and your tax returns. Once you are approved and review the terms of the agreement, you can start drawing funds.
How to Use a Business Line of Credit
When you receive your business line of credit, you can use those funds for any business expenses. If there is a need for new equipment or you’re looking to expand your business, these things cost money. The main purpose of a business line of credit is to help improve your cash flow.
Business owners need to pay employees, pay upfront for materials, invest in equipment, purchase office equipment, and so much more. Another good reason to use your line of credit will be if you have an upcoming project that needs extra funding. Perhaps you received an estimate on how much the project might cost, but you don’t know for sure. In this case, you can draw the funds as needed from your line of credit.
A business line of credit may seem more appealing than a business credit card for a few reasons. The interest rate for a line of credit is often lower, and you can borrow more money. Most business credit cards will not give you a limit up to $100,000 or $250,000 like a business line of credit. There’s also more flexibility in repaying the money you draw.
A business line of credit is helpful during uneven cash flow, growth, or when covering necessary expenses. A business line of credit requirements is not too far off from a standard business loan. However, this option offers business owners more flexibility and access to cash flow as needed. Since you can budget your draws when expenses or new products arise, repaying a business line of credit may seem less overwhelming than repaying a lump-sum business loan.
If you’re ready to start the process of getting a business line of credit, Fundbox is the best option. Fundbox offers low rates, upfront fees and doesn’t require an excellent credit score. Once approved, funds are available to you immediately. Read our review on Fundbox here to learn more.