How To Get a Business Line of Credit In 5 Steps – Forbes Advisor

A business line of credit offers a preset credit limit you can borrow against for business expenses. Businesses that need access to an ongoing pot of cash for operating costs may find that a credit line provides more flexibility than a term loan that only offers one lump sum.

How Business Lines of Credit Work

Credit limits on business lines of credit may range from $10,000 to $500,000 or more.

Depending on the credit line terms, you may be able to draw money up to your credit limit for a specified period, after which the balance is repaid in installments over several months or years.

Requirements for Business Lines of Credit

While there’s no standard minimum credit or revenue requirement for business lines of credit, having the following credentials could put you in the best position to qualify.

• A personal credit score over 600
• Consistent revenue (some lenders require $3,000 or $10,000 in monthly revenue)
• At least one year in business
• An active bank account or three months of bank statements
• No judgments or bankruptcy on your credit report
• A low debt-to-income ratio (36% or lower is considered in the “good” range)
• Collateral to back the credit line (not required, but can lower your interest rates)

Secured vs. Unsecured Business Credit Lines

Secured credit lines are backed by collateral, such as equipment, real estate or inventory.

Pledging collateral could lower your rate and increase your credit limit. That’s because lenders put a lien against the pledged property, which acts as a safety net. If you don’t repay your debt, they can seize it. This reduces your credit risk, which can result in better credit terms.

An unsecured credit line doesn’t require collateral. This option can be more expensive, but it can also be more ideal for startups and other businesses without property to pledge.

5 Steps To Get a Business Line of Credit

Taking the steps below can help you prepare and apply for a business line of credit.

1. Check Your Credit Health

Credit is a key factor lenders review to determine your likelihood of repaying debt. Your credit health helps them decide whether to approve you and at what interest rate. Taking steps to improve your personal credit score can increase your chances of approval.

Making all debt payments on time and minimizing applications for new credit are other steps you could take to keep your credit as strong as possible before applying for a business credit line.

2. Legitimize Your Business

For credit lines, creditors may require businesses to have a formalized business entity set up, such as a limited liability company (LLC) or corporation. To establish an LLC or other legal entity, file documentation with your state’s business registration office. Alternatively, you could use an online business service or hire a lawyer or accountant to handle it for you.

3. Compare Credit Line Options and Costs

Once you complete the preparation steps, compare credit line terms from traditional banks and online lenders. Compare application processes, ways to draw funds and repayment options. Review rates and all fees as well. Here’s a rundown of costs you might encounter:

• Interest rate: Interest rates on business lines of credit are usually variable and indexed to the prime rate.
• Origination fees: Origination fees are a one-time fee to process the credit line. For example, Santander Bank has a $250 origination fee.
• Annual fees: Annual fees are a once-per-year fee that could be flat or a percentage of your approved credit line. For example, Chase charges $200 or 0.25%, whichever is greater, with a maximum fee of $750.
• Draw fees: Draw fees are fees charged each time you request money.
• Maintenance fees: Maintenance fees are a monthly or annual fee to keep your business credit line active.

4. Put Together Required Documentation

Lenders may ask for several documents to confirm your identity and verify information about your business, so it’s worthwhile to compile these documents in advance.

You may need to provide government-issued ID, several months of bank statements, business tax returns, personal tax returns, financial statements and articles of incorporation or articles of organization.

5. Apply Online or In-Person

The final step is to apply for the credit line that best fits your business. Traditional banks may ask that you apply in person at a branch. Online lenders and some major banks offer online applications so that you can apply from the comfort of your couch.

Once approved, you could get access to your credit line within a business day. However, it can take longer if you work with a traditional bank or if the lender needs to review collateral.

Frequently Asked Questions (FAQs)