Getting a Business Line of Credit: The Essential 5-Step Guide
This post was last updated on March 4, 2020 to include even more information about how to get a business line of credit.
When your cash flow doesn’t satisfy your business’s expenses, or you have a new opportunity, you need capital. It’s that simple.
Finding ways to get capital quickly and easily—instead of an exhausting process that takes forever—is key.
Having extra working capital on hand can be your business’s saving grace in countless situations. From expanding your location, to buying new inventory, to operating expenses, capital can be crucial for pushing your business to the next level. But why should you have to take out small business loans every time you need it?
That’s where business lines of credit come in.
Revolving lines of credit gives your business access to a reservoir of funding, which they can draw from as they need to. Instead of being obligated to take (and pay back) a set amount, you can draw more as you need it from a corporate business line of credit. Lines of credit give you greater control over the amount of interest that you pay back, too.
Credit lines are helpful when your business is growing rapidly, and unexpected expenses become the norm.
Benefits of a Business Line of Credit
Why should you get a line of credit over another funding option?
Most business owners like the flexibility. It gives you a way to get cash that you can use for any business-related purpose. This includes long-term growth related expenses like opening a new location, as well as sudden costs, and even payroll.
Additionally, you’ll only pay for the funding you draw. Unlike other small business financing options, lines of credit aren’t a cut-and-dry solution. Even if you’re approved for $100K and only use $80K, you’ll be charged interest on $80K.
Because it can provide you with ongoing access to cash, you’ll generally wind up with access to the funds as you repay them. Through true revolving lines of credit, this funding will become available again as you pay it back.
A business line of credit loan (even though it’s not technically a loan—it’s a financing solution) can be a great resource for you as you encounter new challenges in growing your business.
Best Place to Get A Business Line of Credit
Where can you get a business line of credit? Depending on the industry you’re in, how long your business has been around, and a few other factors, you have multiple options. However, all of these sources of capital will have different requirements and qualifications.
Banks offer lines of credit, and if this is your first rodeo seeking financing, they’re probably the first place you’ll go. If you complete the application and the bank approves your offer, then it might be wise to take it.
You can start this process by contacting your business banker. However, before you begin the process, it’s important to bear in mind the lengthy application and the stiff qualifications. The business line of credit qualifications are normally as stiff as those for small business loans.
Because credit unions are membership-based, you can only access funding if you’re officially a part of one. This includes a fee, and will require you to regularly use your account.
Fintech lenders like National offer business lines of credit as well. The application is far simpler as well, meaning you won’t have to take hours out of your day like you would with a bank. Instead, you can simply apply online, and often, complete the application by connecting your bank account. This is a simple way to provide your financials.
Unlike banks, the requirements and qualifications are far more lax. The interest rates may be slightly higher—though the gap has closed in recent years—but you’ll make up for it in the time you save. With approval possible in as little as a day, you can start growing your business right away.
How Do I Get a Business Line of Credit?
Getting a business line of credit isn’t difficult—as long as you go about the process the right way. If you’re in the market for financing, follow these steps.
1. How To Qualify
Wondering how to qualify for a business line of credit? There are several criteria you should meet. You won’t know with certainty whether or not you qualify until you apply, but you can start by looking into the qualifications beforehand.
If you find that you’re not in the best position to qualify, then you’ll have the time to improve your operation beforehand.
Qualifications vary by lender, but they’ll generally include a mix of the criteria listed below.
While it’s no longer the ultimate business financing requirement, your credit score can influence whether or not you qualify. Generally, lenders will look at both your business and personal credit scores. This helps them to fully understand your business’s current financial situation, as well as your trustworthiness in repaying debts.
Like other financing products, banks will require you to have a high credit score in order to qualify. Specifics will vary, but 680 tends to be the absolute minimum.
Fintech lenders, on the other hand, are more flexible in approving business lines of credit. Instead of enforcing a minimum credit score, fintech lenders are able to structure their financing programs based on the applicant. With a higher credit score, though, you’re more likely to receive favorable terms.
Your monthly or annual revenue is another important requirement to qualify. This number gives lenders a good picture of your cash flow. In other words, your revenue shows how much money is coming into your business, and the amount you can afford to repay.
Because business owners often utilize credit lines to grow, your revenue can also indicate how extra working capital could help.
For most lenders, minimum revenue requirements float around $120K on an annual basis. However, many fintech lenders have programs that may be suitable for growing companies that don’t yet meet that minimum.
With higher annual revenue, though, you may qualify for even more favorable rates, terms and amounts.
Time in Business
Before approving you for a business line of credit, lenders will look to see how long you’ve been in business.
Younger businesses with less of a track record tend to be a higher risk than older businesses—at least on paper. Banks take this requirement more seriously than other lenders, with a minimum of two years in business required. Through fintech lenders, you can generally start qualifying for ideal financing programs after 3 months.
Be sure to report this number accurately. Any false information on your application could result in complications during underwriting.
Lastly, you need to determine what (if any) collateral you’ll put up for your business line of credit.
Previously, collateral was a must-have when it came to getting an approval, especially at larger amounts. With fintech lenders rising in popularity, this is no longer an essential. Collateral allows lenders to “secure” the loan, or guarantee that they’ll receive payment in the event you can’t pay it back.
Common examples of collateral include physical real estate, equipment, and other high-valued assets. To prevent tying up personal assets in business transactions, it’s best to avoid putting up your home in a HELOC.
However, putting up collateral may help lenders to offer better options. This is because lenders feel assured that they’ll receive their funds, regardless of the outcome.
Remember, though, that not all programs will definitely require collateral.
Now that you know the qualifications, start considering the options available.
2. Compare Your Options for Types of Business Lines of Credit
There are a few different types of lines of credit available. Depending on your financials, goals and where you apply, one or more may be available.
There are three ways that you can break down the various types of lines of credit: the source, whether or not it’s secured, and the length of the term. You can start this process by weighing the pros and cons of each type, and discover the best option for your business.
Bank Vs. Credit Union Vs. Fintech
First, consider the type of lender you’ll apply through. Banks, credit unions, and fintech lenders all offer lines of credit, but with different structures.
Banks tend to have the best rates, terms, and amounts. On the flipside, though, they’re the most difficult (and time-consuming) to qualify for. If you’re up for the task of applying, you may have to wait between several weeks and months to learn if you qualify, and for how much. But if this works in your favor, then it might be the right choice.
Credit unions offer a similar structure, but with one major caveat: you have to be a member to qualify. Additionally, getting access to your funds can be a hassle, especially if you plan to draw in increments. Because credit unions tend to have fewer branches and ATMs available, obtaining funds might be difficult.
Fintech lines of credit are much easier to qualify. You’ll have to provide limited documentation (generally only a few bank statements), and can receive funding in as little as 24 hours. The application can be completed online. You can even find bad credit business lines of credit.
Secured vs Unsecured Lines of Credit
Next, think about whether you want to obtain a secured or unsecured business line of credit. As mentioned earlier, secured business lines of credit have collateral backing them, while unsecured options don’t.
Ideally, you should try to avoid tying up your personal assets while getting business financing. However, some lenders (especially banks) may require collateral, or at the very least a personal guarantee. A personal guarantee doesn’t put forth any of your assets specifically, but does mean that you’re personally liable if you default on the loan.
Putting up collateral is a great way to potentially open the door for lower rates, but this changes depending on the lender.
Online lenders tend to limit collateral requirements, and are more likely to offer an unsecured business line of credit.
Short Vs. Long Term
While this can be limited based on what you qualify for, you’ll also have to consider whether you want a short term or long term line of credit. This refers to the amount of time over which you’ll repay the lender.
Short-term lines of credit are generally paid back over the course of a year or less, while long-term programs are paid back over a longer period of time.
Because long term lines require you to pay back the amount over a longer period of time, they can often be more difficult to qualify for. Short-term programs can seem more expensive, but it’s important to remember that you’re being charged less in interest overall.
If you’re using the funds to accomplish something that will drive revenue, then it may make sense to utilize a short-term line of credit. For expenses that don’t drive revenue, like facility improvements, a long-term line of credit might be the better way to go.
3. Meet the Requirements and Prepare Your Paperwork
Once you have a solid idea of where your business stands, it’s time to start getting your application ready. This means preparing the required document(s). For some business owners, this may also mean taking the time to improve things before lenders dig deeper.
Generally, lenders will require some of the following information before approving your request:
- Personal information (like your name, social security number, and ID)
- Business information (like your business’s name, its entity type, your tax ID, and the industry you fall into)
- Credit scores (including personal and business)
- Financial information (like annual revenue, bank statements, and if you apply through a bank, balance sheets, profit/loss statements, and other documents)
- Tax returns (including personal and business)
- Any existing debts (through a debt schedule)
- Legal documents, especially those that bind you to any partners
The lender you apply with may ask for much more or less information. Banks tend to evaluate each application thoroughly, and will request more information, while fintech lenders require only the essentials.
4. Know Your Business Line of Credit Terms, Fees, and Rates
If you’re getting a business line of credit, then it’s best to understand what you’ll be paying for. Specifically, how your interest payments will be structured, and any other applicable fees.
Monthly payments were once the norm, but now, weekly and daily payments have become quite popular. These can be quite convenient for business owners who don’t want to lose a huge chunk of cash at the end of the month.
Instead of manually going through the process, this money can be automatically deducted from your account through an autopay feature. While this is more convenient, it’s important to make sure you don’t exceed your credit limit.
Not all lenders will charge the same fees, but it’s important to ask your lender about any they may charge. Some of the fees you may encounter include:
- Draw fees may be charged every time you withdraw new funds from your revolving line of credit
- Payment processing fees may be charged to deliver your funds instantly, instead of a standard 1-2 day time window
- Late fees may be charged when you miss a standard payment
- Termination fees may be charged if you end the line of credit before the designated time
- Prepayment fees may be charged if you pay off the borrowed amount before the term is over
To avoid surprise charges, always be aware of ripoffs and request information about potential fees before signing.
5. Apply for a Business Line of Credit
Now that you know what it takes to get a line of credit and meet the minimum requirements, it’s time to apply.
The way that you apply will vary from lender to lender.
Through banks and credit unions, you’ll have to make an in-person visit and complete the physical application. This may take several hours, and they could request additional documents or information later.
Most fintech lenders have streamlined their application by fully digitizing it. After completing a short form, you’ll then have the option to connect your bank account so lenders can examine your cash flow, or submit bank statements.
When you receive an approval, you’ll want to check the following details to ensure they’re in line with your business:
- Amount: the full line of credit that you’re approved for (or the maximum amount available)
- Terms: the length of time over which you have to pay the loan
- Payment schedule: how often you’ll be required to make payments (daily payments have become increasingly popular)
- Rates: the percentage of interest you’ll pay (legitimate lenders only charge on the amount drawn, not the full approval)
- Fees: other charges in addition to interest payments (be sure to clarify this with your lender)
How to Get Approved for a Business Line of Credit
Getting approved doesn’t have to be a shot in the dark—there are steps you can take to improve your chances of qualifying.
All of these steps boil down to improving how you manage your business on a day-to-day basis, and especially finances.
These are some of the ways that you can improve your chances of qualifying for a business line of credit.
1. Follow Responsible Business Practices
When lenders look at your application, you don’t want to give them any reason to think twice. For this reason, it’s important to maintain successful business practices, especially in the months leading up to your application.
First, make sure that you pay all your bills on time. This includes suppliers, utilities, rent, and outsourced services. When your cash flow is positive, lenders know that you’re responsible with payments.
Also, be careful not to overload your business credit cards, which could harm your credit score.
2. Apply When You Don’t Have an Urgent Need
The best time to get a business line of credit is when your business does not need one. Why?
Banks will mostly be willing to come to your rescue when your cash flow is promising, and you aren’t desperate for a loan. You’ll then be able to build a strong credit history.
Additionally, if you have an existing credit line, then you can draw from it at any time. If an urgent expense—like payroll or a lucrative new opportunity—comes along, then you can jump on it without skipping a beat.
You’ll also only pay interest on what you take, meaning you won’t make unnecessary payments.
3. Build and Maintain Good Business Credit
Having a strong business credit profile is essential, especially when you’re pursuing new opportunities. To keep these doors open, be sure to always keep your mind on building good business credit.
Pay your bills on time, ensure your financials are properly reported and tracked, and keep a low debt to credit ratio.
4. Do Your Research
Don’t simply walk in blind. Instead, explore the options available and familiarize yourself with rates, terms, amounts, and more.
Can I Get a 100K Business Line of Credit?
Business lines of credit are available in all shapes and sizes. Like conventional term loans and cash advances, you can find business line of credit options ranging from as low as $10K to as high as $500K, and possibly higher.
Getting a $100K line of credit is possible, assuming you meet the lender’s qualifications.
Get Started Qualifying
Ready to get started?
At National, we make the funding process as easy as possible. Once you apply, we’ll give you the opportunity to complete the application by submitting bank statements, or connecting your bank account.
Then, a Business Financing Advisor will reach out to discuss options available to your business. Once you finalize your choice, the funds will be deposited in your account. It’s that quick, simple and easy!
Get started by completing the form now!
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