Traditional business loans are the most common way to finance a business, but a business line of credit can be more accessible for startups or business owners with bad credit. A business line of credit is one of the most flexible forms of financing for small businesses.
You can use a business line of credit for working capital, to cover cash flow issues, or to fund an emergency or unexpected opportunity. If you’ve decided that a credit line is the right financing solution for your business, you may now be wondering how to get a business line of credit.
How to Get a Business Line of Credit: A Quick Guide
The first step is checking your business’s qualifications. By knowing where your business stands ahead of time (as in, before you start comparing options and completing applications), you’ll save time and effort throughout the process.
Although there are a variety of business line of credit requirements you might have to meet depending on the lender you’re applying with, there are a few common qualifications that you can use to evaluate your business’s prospects.
To start, you’ll want to determine where your personal credit score stands. When applying for a business line of credit (or any financial product for that matter), your personal credit score will very likely be one of the first things a lender looks at. Here are a few reasons why:
Generally, it’s safe to say if you have a credit score of 600 to 630 (or higher) you’ll be in decent shape to qualify for most business lines of credit. Many online lenders will be more flexible, with some lenders, like Fundbox, even accommodating a credit score of 500, and others, like Kabbage, with no credit score minimum.
Like your credit score, most lenders will implement a minimum requirement for annual revenue that a business needs to meet in order to qualify for a line of credit. They do this to answer a few questions:
On the whole, just like with your credit score, the higher the amount of annual revenue you have, the better.
When you’re looking to get a business line of credit, you’ll also want to consider your time in business as you evaluate your qualifications. Why?
Online lenders such as BlueVine and Fundbox have very flexible time-in-business requirements for their lines of credit. BlueVine requires six months in business and Fundbox only requires three months.
Finally, you’ll want to evaluate what kind of collateral you can offer, especially if you’re a newer business or have bad credit. There are a few options:
Putting up collateral may make you more likely to qualify for a credit line if your other qualifications are lacking.
Once you’ve evaluated your business’s qualifications, you’re ready to start exploring your options.
You’ll want to determine what type of revolving line of credit will be best for your business, considering secured vs. unsecured, short-term vs. long-term, and bank vs. online credit lines.
By using the qualifications you established in Step 1, you’ll be able to narrow down your options to find the right business lines of credit to apply for.
Generally, a short-term line of credit is a credit line with repayment terms of a year or less, whereas a long-term credit has repayment terms of longer than a year.
Short-term lines of credit are most often offered by online, alternative lenders. Here are some benefits of short-term lines of credit:
And now, here are a couple downsides:
If you have higher qualifications and can accommodate slower funding, you’ll want to focus on longer-term lines of credit, like a bank or SBA credit lines. Here’s why:
Next, you can narrow down your business line of credit options by deciding whether you want a secured or unsecured line of credit.
It’s actually very difficult to find a truly unsecured business line of credit. Even if a lender doesn’t require physical collateral, they’ll often require a personal guarantee or implement a blanket lien to secure your credit line.
To avoid putting up physical collateral, you’ll want to focus on lines of credit from alternative lenders. Lenders like Kabbage and OnDeck won’t require you to put up business assets for your line of credit, but they will likely ask for a personal guarantee or take out a lien on your business.
On the other hand, if you are willing to put up collateral (and have other top qualifications) you may turn to bank or SBA credit lines. These lines of credit will also have the best rates and terms.
It’s also important to consider that putting up collateral for your line of credit may not only make you more likely to qualify, but overall, it may also help you secure more desirable rates and terms.
It can be tough to determine if you should go with a bank line of credit or an online lender. This might help:
Online Lender Pros
Online Lender Cons
If you have strong qualifications but simply don’t want to go through the process of applying for a bank or SBA line of credit, you might turn to a lender like Fundation, which can offer a longer-term credit line with affordable rates, and funding in as little as one business day.
After you’ve narrowed down your options, you’re ready to start preparing your applications.
Let’s say, for example, you considered your business’s qualifications and the different types of credit lines and decided that applying for Kabbage and BlueVine lines of credit will be best for your business.
Now, you’ll want to take a look at the application for each of those lenders and determine what requirements you’ll need to meet to qualify.
After you’ve gathered all of the documents necessary based on your lender’s requirements, you’re ready to complete your application and apply.
If you’re applying for a business line of credit from an alternative lender, you’ll likely find that the online application is fairly simple, requires limited documentation, and can be completed in minutes. On the other hand, if you’re looking to get a business line of credit from a bank or from the SBA, you need more documentation and the process will be longer. Many banks (like Chase) will require that you go in-person to apply for a line of credit.
Once you’ve submitted your application, make sure that you’re prompt to answer any questions or requests from your lender. This will help expedite the process and get you access to your funds faster.
Generally, online lenders can fund business line of credit applications quickly, sometimes even within one day. As you may have expected, banks will be slower to fund, taking anywhere from a few days to a few weeks.
After you’ve completed the application and answered any requests, the lender will come back with an offer (if you’re approved). At this point, you’ll want to carefully review the offer to understand how much your business line of credit will cost—and you should compare all of the offers you receive to ensure that you’re getting the best rates and terms. In particular, here are some things to keep an eye out for:
Once you’ve reviewed the offers, asked your lender any questions, and decided on the best business line of credit for you, you’ll be all set to sign the agreement and receive your funds.
Yes, even if you have bad credit, you may still be able to qualify for a business line of credit. Online lenders that offer business lines of credit for bad credit include Kabbage, Fundbox, and Headway Capital.
It’s important to remember, however, that even if you do qualify for one of these products, they’ll very likely have higher interest rates in comparison to other business lines of credit.
Use our guide to learn more about business lines of credit for bad credit.
The loan amounts available for a business line of credit vary largely based on the lender—however, compared to other types of business loans, you’ll find that credit lines are usually available in smaller amounts—ranging from about $5,000 to $250,000.
Of course, the amount that any individual business receives also depends on their specific qualifications as well.
Business lines of credit work similarly to a credit card in that a bank or other lender gives you access to a set amount of funds that you can draw from and use at any time.
When you draw from your credit line, therefore, you can use the funds for any business purpose—and you repay what you’ve borrowed, plus interest. Unlike a traditional term loan, however, you only pay interest on the funds when you use them.
Plus, in most cases, business lines of credit are revolving—once you’ve repaid what you’ve borrowed, your credit line resets to its original limit and you can continue to pull from the line as needed.