How To Get A Business Line Of Credit

Nitat Termmee/ Getty Images; Illustration by Austin Courregé/Bankrate

A business line of credit can act as a financial lifeline to almost any small business, offering a short-term funding solution for cash flow, inventory or unexpected expenses. Functioning like a credit card, it offers a convenient solution for withdrawing funds as needed.

Business lines of credit are designed for managing cash flow and can be a good option for frequent, smaller expenses. You can continue to withdraw funds and repay what you borrow through the draw period, which may last one to five years. After you withdraw funds, you will then have a set timeline to repay the funds, such as six or 18 months.

Working with a lender for a business line of credit takes careful consideration, though. It’s essential for a business to shop around so it can find the best interest rate and repayment terms that fits the business needs. Each lender has its own criteria for approval, including what documentation it’ll need from the business.

1. Decide between a secured and unsecured line of credit

Both secured and unsecured lines of credit can benefit a business. A secured line of credit is useful for business owners with valuable assets or business owners with less-than-ideal credit. By providing collateral, you may score a lower interest rate than you would get with an unsecured line of credit.

By providing collateral, you may score a lower interest rate than you would get with an unsecured line of credit. That’s because the collateral lowers the risk of offering a business loan to your business. You may also be more likely to get approved for a loan with bad credit than with an unsecured line.

Because the risk is higher on an unsecured line of credit, lenders typically require a higher credit score — in the mid-600s or above — and a higher annual revenue.

The differences between secured and unsecured lines of credit:

2. Research business line of credit requirements

All lenders set their own requirements for opening a new business line of credit, some more lenient than others. You’ll want to review the information the lender provides on its website or through representatives before you spend time applying for the loan.

Common areas that lenders look at when setting requirements include:

• Years in business: Most lenders want to see one to two years in business, though some fintech lenders will allow six months in business.
• Revenue and cash flow: Lenders want to see that you have a healthy flow of revenue and that you can handle making debt repayments. Lenders often set a minimum annual revenue, such as $100,000 to $250,000.
• Business and personal credit score: A business can have a business credit score showing how the business handles its finances, much like a personal credit score. Lenders may set a minimum business credit score that you must meet to be eligible. Many lenders also look at your personal credit score, often set at 600 or higher depending on the lender. Some online lenders accept a personal credit score of 500.
• Industry: Lenders may exclude some industries from getting a business loan, such as businesses in the cannabis industry. They may also tighten requirements or disqualify businesses in industries with a high failure rate, such as restaurants.
• Business plan: Some lenders may want to see your expected trajectory of growth through your business plan, including your forecasted revenue, marketing and goals. This helps them understand how you’ll handle paying back the business line of credit when you use your available credit.

3. Gather the required information

Your small business lender will likely want to see general information about the business, its owners and its finances. They’ll also want to know the loan amount you’re pursuing.

Required documents often include:

• Business licenses
• Articles of incorporation
• Personal and business bank statements
• Profit and loss statements
• Business plan
• Personal and business tax returns
• Information about other debt obligations

If you’re applying for a secured loan, you’ll also have to demonstrate your ability to provide collateral. Some lenders may require that owners sign a personal guarantee, which guarantees the loan with your personal assets.

4. Select a lender

Multiple types of lenders offer business lines of credit, including traditional banks, credit unions and online lenders. Online lenders and credit unions often have more flexible qualification requirements than traditional banks.

Before selecting a lender, it’s important to research potential lenders and compare features to be sure you’re getting the best option. Features to compare include:

• Maximum credit limits. The maximum amount you can borrow will depend on the lender, your credit score and the type of business line you apply for. The lender will set the maximum amount that it will lend to you during the application process.
• Draw periods. Be sure that you understand the terms of your line of credit, such as how long the available credit will remain open for you to withdraw funds.
• Repayment terms. Pay attention to how long you have to repay the loan once you withdraw funds. Repayment terms are typically short, such as six to 24 months.
• Requirements. It’s important to look at the business line of credit requirements to be sure your business can meet them. Lenders typically want to see good personal credit and sufficient cash flow to cover repayment.
• Interest rates. Your business line of credit interest rate will depend on the lender and your creditworthiness. Typical rates could run anywhere from 8 percent to more than 60 percent.
• Reporting to credit bureaus. Most business lines of credit will report to the credit bureaus, helping you build business credit. But look in the fine print to be sure since some lenders may not report your payments.

Loan fees

When getting a business line of credit, lenders charge fees and interest, both to open and to use your financing. A few common fees to watch for include:

• Draw fee. Many lenders charge a draw fee each time you tap into your line of credit, which could be anywhere from 1 percent to 4 percent of the amount you withdraw.
• Origination fee. Some lines of credit charge a fee for opening the credit line with the lender. This fee typically costs 1 percent to 3 percent of the principal loan amount.
• Payment processing fee. Some lenders charge a payment processing fee for the convenience of paying your bill online.
• Wire transfer fee. This fee, typically around $15, is charged each time you wire funds to your account.
• Late fee. If you miss a payment, you may be charged a late fee.
• Prepayment penalty. You may be charged a prepayment penalty if you repay your loan early. This fee is less common with lines of credit than with other types of business loans.

Use a business loan calculator to help you estimate total costs.

5. Apply for a business line of credit

Once you’ve identified a lender that offers the type of line of credit you need, you can apply online, over the phone or in person, depending on their application requirements.

Make sure you’ve provided all the required documents. Also, confirm the details and numbers you’ve gathered before submitting.

If you work with an alternative lender, you may receive an approval decision and funding within a few days. Banks and credit unions tend to take a few days or weeks, but they may be able to offer more competitive rates.

Additionally, taking a couple of extra steps before submitting an application can boost your odds of approval for a business line of credit. These include:

• Check your credit score. Checking your personal and business credit score can help you spot potential errors and give you time to dispute any errors with the credit bureaus, if needed, which can increase your score(s).
• Ask the lender for feedback. Try finding a lender who is willing to work with you and help improve your chances of approval. If you do receive a rejection, ask for feedback for future applications.

Is a business line of credit right for you?

You might get a business line of credit if:

• You don’t need to borrow large amounts of money
• You expect to make small, short-term purchases
• You need regular access to credit to draw from when needed
• You don’t qualify for a conventional term loan

You could also choose to prequalify for a business line of credit and other loan types to see which loan offers you the best interest rates and terms. Prequalification allows you to see the loan offer without performing a hard check against your credit and impacting your credit score.

Bottom line

Getting a business line of credit is a great loan option for businesses. Companies can access their line of credit when needed and only pay accrued interest on the amount they use.

As with any financing, business lines of credit have associated costs and fees. Consider the cost — plus other features the lenders offer — before applying to ensure that the line of credit you choose is the right fit for your business.

Frequently asked questions

• Can you get a line of credit to start a business?

  You may be able to find a line of credit — or other financing — with a lender that offers startup business loans. In general, most lines of credit require you to be in business for six months to a year or more.

• How long do you need to be in business to get a line of credit?

  On average, lenders have a minimum time in business requirement of six months to two years to qualify for any financing, including lines of credit.

• Is it hard to get a business line of credit?

  Business lines of credit tend to be easier to qualify for than other types of business loans. But it depends on the lender you choose to work with and the type of line of credit your business needs. Online lenders and secured lines of credit are typically easier to qualify for.

• What alternatives are there to a business line of credit? 

  You can find several alternatives starting with a business credit card, which could work if you need to make a one-time purchase and can pay over a period of time. Applying for a grant from federal, state and local organizations is another resource and it doesn’t have to be repaid (though highly competitive). Crowdfunding is another possibility, which is essentially a campaign for raising funds to help grow a business.