Looking for a flexible form of funding for your business? A business line of credit just may be the answer. Unlike a traditional loan, a line of credit works similar to a credit card. A lender assigns you a set credit limit based on a number of factors. You’re able to make draws on this line of credit up to your set credit limit. You may make just one large draw or several smaller draws as long as you don’t exceed your credit limit.
If you have a revolving line of credit, you have even greater access to capital. With a revolving line of credit, funds are replenished as you pay down your balance, giving you access to funds again and again. You can use your line of credit as working capital, to hire new employees, to cover an emergency expense, to fill seasonal revenue gaps, or for any other business expense.
In addition to the flexibility of lines of credit, business owners and entrepreneurs also frequently receive fast funding. Some lenders give approvals for lines of credit in just minutes, giving you instant access to the capital you need right when you need it.
In this post, we’re going to explore the requirements for receiving a business line of credit. We’ll cover what lenders look for when approving your application and determining your credit line. We’ll also discuss the documentation required by most lenders. Before you start seeking out lenders, read on to better prepare yourself for the process.
What Does It Take To Qualify For A Line Of Credit?
One of the benefits of a line of credit is that there are options available for nearly any business. Because lines of credit have shorter repayment terms than many other forms of funding, borrowing requirements are often more lenient. However, this varies among lenders. Traditional lenders like banks typically offer lower rates and better terms but have more requirements, including a solid personal credit score. Some alternative lenders focus on the performance of your business and may not even consider your business or personal credit history but may have higher rates, more fees, and less favorable terms.
To qualify for a line of credit, you should, at a minimum, have a time in business of at least 3 months. However, some lenders may require a longer time in business — think 6 or 12 months — in order to qualify. You will also need to show proof of business revenue in order to qualify. At a minimum, your business should have at least $50,000 in annual revenue. Again, though, the lender you select may have higher minimum revenue requirements of $100,000 or more per year.
Even if you meet the minimum requirements of a lender, it’s important to remember that this doesn’t guarantee you’ll be given a line of credit. Since the performance of your business is an important qualifying factor, only meeting the minimum requirements may score you an approval, but you may be given a lower credit limit. In other words, don’t expect to receive the maximum borrowing amount if you have low revenue and a short time in business.
While some lenders use the performance of your business as the primary factor for approval, many also take a look at your personal credit profile. Lenders use your credit to determine if you’re a risky borrower. Some lenders, for example, won’t approve applicants with recent bankruptcies, liens, or defaults on loans. Others only approve applicants with a fair to excellent credit score. Your credit profile may also be used to determine your rates, fees, and maximum borrowing amount. This varies by lender, so ensure that you meet all credit qualifications before hitting “Submit” on your application.
Some lenders also take a look at your business credit profile, although it’s more common for the lender to consider your personal credit history. If you haven’t yet built up business credit history, find a lender that doesn’t have this requirement. If you have a solid personal credit score and history, applying for a personal line of credit to be used for business expenses may also be an option.
You should also be prepared to put up collateral for your line of credit. Generally, this means that you’ll sign a personal guarantee or have a blanket lien put on your business. A personal guarantee is just what it sounds like: you’re taking personal responsibility for paying back the line of credit. If you default, personal assets may be taken. A blanket lien is similar, only it covers the assets of your business. If you default on payments, the lender has the right to seize business assets to repay the debt.
How Lenders Evaluate Eligibility: The 5 Cs Of Credit
As previously mentioned, lenders evaluate the risk of borrowers when determining if you’re approved for funding, as well as the rates, fees, and terms of your financial product. To evaluate risk, lenders look at the 5 Cs of credit.
The first C stands for character. In other words, are you trustworthy? Your credit score and history are a good measure of character. Some lenders may also require a personal interview or may reach out to your references to get a better grasp of your character.
Next, lenders look at your capacity — whether you’re able to afford the financial product you’re applying to receive. Lenders evaluate capacity by looking at factors including incoming cash flow, current expenses, debt-to-income ratios, and debt service coverage ratios. This information is also used to determine your maximum borrowing amount.
The next C on the list is capital. Have you invested in your business? If so, you have something to lose if the business goes under. An investment of your own capital gives a lender more confidence that you’ll work to make your business successful … including paying off your debts.
The fourth C stands for collateral. Collateral is personal or business assets used to secure the loan. If you don’t pay the lender, they have the right to seize this collateral. While your lender may not require specific capital, expect to sign a personal guarantee or have a blanket lien put on business assets.
Finally, lenders evaluate conditions. This includes the state of the economy, your industry, principal, interest, and other factors. If conditions aren’t favorable, you may not qualify for funding, or you may qualify to receive a smaller amount than you applied to receive.
Want to know more about how lenders evaluate risk? Learn more about the 5Cs of Credit.
Documents Needed To Apply For A Business Line Of Credit
Your lender may require you to submit documentation at the time of application. Other lenders may have additional documentation requirements further along in the process before approving your application and determining your credit limit. The documentation you need to receive a line of credit varies by lender, but let’s explore some common requirements so you can be prepared for the application process.
Most lenders require a copy of your driver’s license or another form of government-issued identification to prove your identity.
Business bank statements are used by lenders to show your revenue, incoming cash flow, and expenses. Expect to submit statements from at least the last three months, although some lenders may require bank statements from the last 6 months or longer.
Remember, lenders are all about risk, so some may require additional financial statements that reflect the performance of your business. This documentation may include but is not limited to balance sheets and profit and loss statements.
Some lenders may require personal and/or business tax returns during the application process. You should plan to have access to at least the last three years’ worth of returns.
Articles Of Incorporation
You may be required to show the Articles of Incorporation, business licenses, or other proof of ownership for your business. Some lenders also require the signatures of all owners before issuing a line of credit, so make sure you know your lender’s specific requirements.
Proof Of Collateral
If specific collateral is being used to secure your line of credit, documentation showing the proof of collateral may be required. If specific collateral is not required, remember that you may be required to sign a personal guarantee or agree to a blanket lien before using your line of credit.
Voided Business Check
A voided business check may be required by your lender. This is primarily used to verify bank account information, particularly when automatic payments will be withdrawn from your account.
Most lenders will pull your personal credit report to determine if you qualify for a line of credit. While you won’t necessarily need to submit your own credit report, this is good to have on hand so you can understand your score and any potential obstacles to funding. For certain lenders, such as banks and credit unions, you might also want to pull your business credit report as well. Learn more about receiving your free credit score online.
A line of credit is a great way to fill revenue gaps, cover unexpected expenses, or to use for expansion of your business. However, as with other financial products, make sure to shop around for the best rates and terms for your business. Once you’ve narrowed down your lender choices, keep an eye on fees, hidden costs, and the total cost of borrowing to determine if getting a line of credit is a smart financial move for you.
Unsure of where to start when it comes to finding a line of credit? Start your search with our list of the best business lines of credit. If credit challenges have prevented you from getting funded elsewhere, check out our post, The 5 Best Business Lines Of Credit For Bad Credit.
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