Business lines of credit are one of the most versatile types of business financing. They’re similar to credit cards in many ways, but their credit limits are often many times higher and interest rates much lower.

Because you can draw on them at any time, they can help cover operational expenses in periods of thin margins or low revenues. If you’d like to apply for an account, here’s what you should know about the typical business line of credit requirements.

Requirements for Getting a Business Line of Credit

Because business lines of credit have much higher maximum credit limits than credit cards, the requirements for getting one are also more significant. No one is going to hand over a credit account worth $100,000 or more without careful consideration.

Though the specifics vary between lenders, the underwriting usually involves an assessment of your personal and business credit scores as well as the age and financial strength of your business.

Here’s a more in-depth review of what they’re likely to require of you.

Personal Credit Scores

Even though you’re applying for a business line of credit, most lenders check your personal credit score as part of your application.

The primary reason for this is that most business lines of credit require a personal guarantee from each business owner. That means if your business can’t afford to pay back what it borrows, you’ll be personally liable for the balance.

You may still be able to get a business line of credit with a bad personal credit score, but it’ll be difficult, and you’ll probably end up with a higher interest rate.

Aim to have a credit score that’s at least good, which starts at 670 under the FICO credit scoring model.

Business Credit Scores

Lenders may also look at your business credit score when you apply for a business line of credit if you have one.

If you’ve only recently become a small business owner, you probably won’t have enough credit history to generate a score yet. You can lean on your personal credit during this time, but the sooner you build business credit, the better.

That’s because if you qualify for financing under your personal credit score, there’s no way to avoid signing a personal guarantee for the debts.

However, you might be able to get away without doing so if you separate your business from yourself and strengthen its qualifications as much as possible.

That typically means forming a business entity, improving your financial position, staying in business for at least a few years, and establishing a solid business credit score.

Basic Business Information 

As you would expect of any financing application, lenders will ask for some background information when you request a business line of credit. They’ll often want things like the following:

• Identification information, including your EIN
• Contact details such as your address and phone number
• Your business entity’s legal structure, i.e., limited liability company (LLC), partnership, or corporation
• Proof of any necessary business licenses for your industry
• Documentation like bank statements and tax returns

Lenders usually have more specific application details on their websites, such as Bank of America’s requirements for a small business loan or revolving line.

Business Financials

Personal and business creditworthiness considerations are only half of the typical business line of credit requirements. Lenders also need to know that your business has a strong enough financial position to pay its debts.

To verify that, they’ll usually review your financial statements, including a balance sheet, income statement, and sometimes a statement of cash flows. Some of the things they may examine closely are your:

• Existing liabilities and ability to meet them
• Bank account cash reserves compared to operational expenses
• Gross and net profit margins
• Cash flow growth and consistency

You can get a feel for your business’s strength in these areas by calculating financial metrics yourself. For example, your current ratio measures your ability to pay your short-term debt obligations.

It’s equal to your current assets divided by your current liabilities, and lenders want to see that it’s at least greater than 1.00. If you see any metrics that might be red flags to a lender, try to improve them before applying.

Time in Business

It’s probably not news to you that many small businesses fail within their first few years of operations. Lenders are well aware of that fact, too, and they’re often unwilling to offer lines of credit to businesses that are too young.

A traditional financial institution, like a bank or credit union, will usually require that you be in business for at least two years. Bank of America and Wells Fargo are two examples of lenders with that standard.

Online lenders are generally less strict about this, but they’ll still have a minimum threshold. For example, Kabbage only requires that you be in business for a year, and BlueVine may work with you after just six months of operations.

Annual Revenue

In addition to credit score and time in business minimums, lenders usually use gross annual revenue as one of their primary qualification requirements for a business line of credit.

Your gross revenue is the amount of money you collect before paying any expenses, including taxes.

You’ll need to have at least $25,000 in gross revenue to have a hope of getting a business line of credit, but most lenders set their minimums at either $50,000 or $100,000.

Online lenders tend to be on the lower end of the spectrum, while traditional financial institutions are usually more demanding.

Industry

Some industries tend to be riskier than others, and lenders may have restrictions on which types they’re willing to finance. They often avoid businesses with significant overhead costs, high competition, or inconsistent revenues.

Restaurants are a notorious example. You need to lease a location, hire staff, and buy cooking supplies before you can earn anything. There’s also endless competition, and revenues are far from guaranteed. Even a few bad reviews could cripple you.

Lenders may use the Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS) codes that show up on business credit reports to identify your industry. They’re not always correct, though, so double-check yours.

Typical Pitfalls When Applying for a Business Line of Credit

Applying for a business line of credit can be an intensive process, but it’s often well worth it. It’s one of the most valuable forms of financing, with a more flexible repayment schedule than a term loan and a lower interest rate than a credit card.

Here are some of the typical pitfalls you’ll need to overcome to qualify:

• Insufficient personal credit: Lenders can be demanding when it comes to your personal credit. For example, PNC Bank wants you to show five years of credit history without a missed monthly payment. Start building your personal credit score as soon as possible if you want a business line of credit. 
• Time in business: Lenders rarely budge on this requirement, which means you may have to survive your first few years of operations with limited financing. Consider using invoice financing or factoring to bridge the gap.
• Existing debt requirements: Lenders are careful not to lend to businesses already burdened by too much debt. Getting through your first few years with enough debt to survive but not so much that you scare off a bank can be difficult. Do what you must to keep your business going, but be well aware of the costs.

Every lender has different eligibility requirements, so if a bank turns you down, it doesn’t necessarily mean that you can’t qualify for another account from an alternative lender.

That said, it might be better to improve the strength of your application and try to get a line of credit from a bank again later rather than resort to an online lender. The price difference can be significant.

Difference Between Secured and Unsecured Business Line of Credit

There are two types of business lines of credit: secured and unsecured. Secured accounts require that you provide some form of collateral to qualify, which the lender can seize if you ever fail to repay your debts.

Lenders may ask for different types of collateral from you, but typical options include inventory, certificates of deposit, and blanket liens on all of your business assets.

Because a secured business line is safer for the lender than an unsecured line, they’ll often be willing to give you better terms for the former. For example, here’s a comparison of Bank of America’s secured and unsecured lines of credit:

• Secured: Line amounts from $25,000 with interest rates as low as 3.75% 
• Unsecured: Line amounts from $10,000 with interest rates as low as 4.50%

Note that there may also be different qualification requirements for each type of account. In general, it’s easier to get a business credit line if you’re willing to put down collateral.

How to Get a Business Line of Credit

Though the qualification requirements for a small business line of credit vary, you’ll usually need to meet minimum thresholds in the following three areas to be eligible for an account:

• Personal and business credit scores
• Time in business
• Gross annual revenues

When you’re browsing for an account, you should be able to weed out options at a glance using these criteria.

When they talk about your personal credit score, most lenders are referring to your FICO score. You can get a free copy of it from the credit bureau, Experian, plus a copy of your credit report.

Unfortunately, you’ll usually have to pay for copies of your business credit scores. Lenders are less unified on which business credit score they prefer, so consider waiting until you have a short list of providers you’re considering before you pay to check any.

Once you have that list, compare the options based on terms like their cost, renewal policy, and credit limit before applying.

Note that lenders aren’t required to give you the total annual percentage rate (APR) of business accounts like they do with consumer accounts, so do your due diligence to find the total cost of each line of credit, including interest and fees.

Business Credit Cards vs. Business Line of Credit

Business credit cards and business lines of credit are both revolving debt, but there are significant differences between the two types of accounts. These are the four primary ones to consider:

• Qualification requirements: Business credit cards are usually easier to qualify for than business lines of credit. You can often get away with less time in business, a weaker credit score, and lower revenues.
• Grace periods: Credit cards have a grace period of roughly 25 days before charging interest. Lines of credit start accruing interest as soon as you take a cash advance.
• Costs: Business credit cards usually have higher interest rates than business lines of credit, but their grace period can make up for it depending on the repayment term.
• Credit limits: Business credit cards usually have a lower credit limit than business lines of credit. Lines of credit regularly have limits as high as $250,000.

Neither type of credit line is inherently better than the other, but they fulfill different needs. The length of your intended repayment term is usually the deciding factor.

A business credit card is better for smaller expenses if you only need to finance for a week or two. However, if you know you’ll take longer than the typical card’s grace period to pay, a business line of credit is superior.

FAQs

How Long Does It Take To Get Approved for a Business Line of Credit?

It can take anywhere from a single day to several months to get approval for a business line of credit. The most significant deciding factor is the type of lender.

Traditional financial institutions usually take longer to give you an answer. They have a much more intensive underwriting process that often includes thoroughly reviewing your financial statements.

Meanwhile, an online lender may be able to give you an answer almost immediately. For example, Kabbage claims they can approve you for a line of credit in 10 minutes or less.

The strength of your application can also play a role. If it’s not clear at first glance whether or not your business should qualify, it may take longer to get a decision.

Is a Business Line of Credit a Good Idea?

A business line of credit is a tool like any other type of credit account. It’s useful for some businesses in certain situations, but it’s not the right fit for everyone.

For example, if you need help covering payroll expenses during low revenue periods, a business line of credit can be a good idea.

Payroll costs are usually too high to put on a credit card, and a business loan isn’t a revolving credit account, so you won’t be able to draw on it when you need it.

Conversely, if your business is less than a year old, it’s going to be tough for you to qualify for a line of credit. Even if you did manage it, the interest rate would likely be so high that it might not be worth it.

You’d be better off using something like invoice financing to generate working capital until you’ve been in business for at least a couple of years.

Is It Hard To Get a Business Line of Credit?

Though the qualification requirements vary significantly, it’s usually harder to get a business line of credit than a business credit card.

To qualify for a business line of credit, you’ll need to meet requirements in the following categories:

• Personal and business credit
• Gross monthly or annual revenue
• Time in business

Lenders may also examine your business’s financial statements to verify that you can repay the amounts you borrow.

Notably, it’s generally more difficult to qualify through a traditional lender like a bank than an online, alternative lender.

For example, Bank of America requires you to have two years in business, a 670 credit score, and $100,000 in annual revenue to qualify for their unsecured line.

Meanwhile, Kabbage, an online lender, only requires one year in business, a 640 credit score, and $50,000 in annual revenue.

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