"What is a Business Line of Credit"

What is a Business Line of Credit?

A business line of credit gives you access to credit limit that you can use whenever you need and repay over time. Similar to a business credit card, a business line of credit is known as “revolving credit,” because you can access your funds whenever you need to, only pay interest on the funds you draw upon, and once you pay back the amount you’ve drawn upon, the credit limit will automatically replenish. A business line of credit is typically a good option for borrowers who need access to working capital.

How a Small Business Line of Credit Works

A business line of credit is a revolving line that you can draw against as you need it. It’s typically used for short term working capital to help improve cash flow, or to finance the costs of unexpected expenses.These commercial credit lines are similar to a credit card where the line is open and available for you to use, and you only pay interest on the part of the line you draw. It’s a great way to get access to cash which can be put into your business on a moment’s notice.

Unlike a term loan, as you pay down the balance on your line of credit you increase the amount available to draw in the future. Once a credit line is established, drawing funds from it is usually the fastest way for your business to access capital for quick payments or unexpected events.

With a line of credit, you can keep reusing and repaying it as often as you’d like, as long as you make payments on time and you don’t exceed your credit limit. Most lenders allow you to repay your balance in full early to save on interest costs.

How to qualify for a business line of credit

Most traditional lenders, such as banks, require businesses to have strong revenue and at least a few years of history to qualify for a line of credit. Larger lines of credit may require collateral, which can be seized by the lender if you fail to make payments.

To apply, lenders typically require the following documentation: personal and business tax returns, bank account information and business financial statements, such as profit-and-loss statements and a balance sheet.

Online business lenders typically have looser qualifications than banks. However, these lenders are also likely to charge higher rates than banks and may have lower credit limits. At a minimum, you’ll need at least six months in business and $25,000 in annual revenue to qualify for a business line of credit. Although some lenders don’t set a minimum credit score, borrowers most likely will need a score of 500 or higher to qualify.

It’s good to know that generally, business lines of credit are available to borrowers who may have a less-than-stellar credit score.This is because of the characteristically shorter repayment terms that you get with a business line of credit. The shorter the repayment terms, the more confident the lender can be that you will actually pay back your loan.

Therefore, a lower credit score is more acceptable.

However, keep in mind that there are different types of business lines of credit—some are considered short-term lines of credit (which are good for business owners with a lower credit score), and some are medium or long-term business lines of credit. These might require a higher credit score to qualify. It’s also good to note that while some lenders will look at your business’s credit score, most will require a minimum for your personal credit score instead.

So, what sorts of business are generally able to secure this flexible form of financing?Newer businesses with less credit history might be able to qualify for the short-term lines of credit that we mentioned earlier. However, if you’re looking for a medium to long-term line of credit—you’ll likely need a good credit score and solid financial history.

But don’t despair, you can get a short-term line of credit and use it as a tool to build up your credit and secure a longer-term business line of credit later on. The maximum amount of funding, introductory duration of the credit line, and length of repayment terms will depend on your business’s revenues, credit score, and history along with other factors.

At a minimum you’ll need:

6+ months in business

$50,000 + in annual revenue

When to Apply for a Small Business Line of Credit

Applying for a line of credit at the right time can position you to be approved for a larger limit, low interest rate, and more comfortable repayment schedule. Knowing when that time is can help you get the LOC you need for your business.

Generally, it’s a good idea to apply for a line of credit if you match one of these four scenarios:

1. Apply When Your Credit Score is Strong

Check your credit and make sure it’s looking as good as it can be. If something is being misreported, dispute it and apply for the line of credit once the dispute is resolved. If you need to pay down some revolving debt to improve your score, do so. You can check your credit score here for free.

2. Apply While Revenues Are Up

You want a lender to see why they should want to lend you money, not why you need a loan. Putting your best foot forward means applying for the line of credit when revenues are up and you aren’t desperate for financing. Since you’re not paying interest until you draw on the line of credit, applying for the line before the funds are needed is a no-brainer.

3. Apply For an Upgrade When You Hit a Milestone

Lenders set benchmarks for credit scores, gross revenues, and time in business. If you hit a new benchmark, like making it to the 2-year mark as a business or boosting your credit score by 50 points after paying off some old bills, consider requesting an upgrade to your existing business line of credit or shopping around with some next tier lenders.

4. Apply in Advance if You Anticipate an Upcoming Capital Need

These rules can be hard to stick to because for many small business owners it seems counterintuitive to ask for financing when you don’t really need it. But when it comes to a small business line of credit that’s exactly what you need to do.

Bottom Line

A line of credit can be a very affordable solution for both short-term working capital needs and emergency financing. However, it requires you to plan your application in advance to get the best rates and terms. Your best line of credit option is through a traditional bank lender, but their qualifications are very tough to meet. It’s easier to qualify with online lenders, and you’ll get funded much quicker.