I’ll walk you through the step-by-step process of how to get a business line of credit — from considering your financing needs and completing an application to understanding rates, terms, and qualifications and using the credit line. I’ll also guide you in choosing the best option for your business. Getting a line of credit can provide flexible financing opportunities to cover various business-related purchases.
Step 1: Consider your business financing needs.
First and foremost, you should determine how a line of credit would benefit your business financially. Assess how often you’ll use the credit line and the typical draw amount to avoid inactivity fees or per-draw charges from lenders.
Also, consider how long you would need the line open and what your business can afford for a monthly payment if necessary. Many small business credit lines have repayment terms of up to 36 months, so ensure the term and repayment amounts align with your cash flow needs. If you plan to pay off the balance quickly, be cautious of lenders that impose prepayment penalties, which could add extra costs.
Overall, those factors will influence your financing request in terms of loan amount, interest rate, and repayment terms.
Step 2: Understand your loan options.
If your business is established and well-qualified, you can likely opt for either a secured or unsecured credit line. However, you should factor in what forms of collateral you might have to offer if needed, along with what you’re looking for in terms of an interest rate and repayment period.
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Step 3: Review your qualifications.
Before applying, review your qualifications across various criteria so that you know what lenders may be applicable for your financing needs. Common qualification factors include credit score, time in business, and annual revenue.
While specific qualification criteria will vary per lender, common minimum requirements are as follows:
- Credit score: 650+
- Time in business: 6+ months
- Annual revenue: $100,000+
Step 4: Compare lenders and review eligibility.
After you’ve determined your financing needs and qualifications, begin shopping around for a lender you would be eligible for. It’s important to compare a variety to ensure that your business financing needs are being met and that you get the best deal.
You should look for items inclusive of interest rates, collateral or personal guarantee requirements, repayment terms, associated fees, minimum draw amounts, and funding speed. It’s also worthwhile to consider customer reviews, hours of operation, and experience within your business industry.
Step 5: Fill out an application.
Once you’ve chosen which lenders are best suited for your needs and qualifications, you can begin the application process either online or in person, depending on the lender. This generally entails providing contact information, details regarding your business, and the specifics of your financing request. Applications will vary by lender; however, it’s common that you’ll be put in touch with a representative of the lending institution to go over next steps.
Step 6: Provide necessary documentation.
In addition to the application, the lender may request supplemental documentation. This can vary depending on the circumstances of your financing request.
Commonly requested documents include the following:
- Tax returns (business or personal)
- Profit and loss statements
- Business bank statements
- Balance sheets
Tip: It’s worth preparing these ahead of time so that they’re readily available in case the lender requests them. This can help streamline the application process.
Step 7: Determine approval status.
Once you’ve provided all the necessary materials, the lender will review your application. Pending approval status can vary, as some lenders may provide a same-day decision, whereas others may take a few days to determine your lending decision.
During this time, the lender may continue to request additional information regarding your business. As such, it’s important to remain in contact and be quick to provide any details it may need to come to a final decision.
Step 8: Review loan terms.
If approved, the lender will issue a term sheet outlining the various terms and conditions of the line of credit. At this point, you can negotiate certain terms before signing on the dotted line. In this step, it’s important to ensure you understand the presented rates, repayment terms, minimum draw amount, and any fees before coming to an agreement. Should you have any questions, be sure to work with the lender.
Step 9: Sign loan agreement.
Once you’ve determined that the loan meets your business needs and budget, you can sign the official loan agreement. Once the paperwork is fully executed by all parties, it’s a legally binding contract that is enforceable. The lender will then move to facilitate the loan, which usually takes 24 to 48 hours.
Step 10: Begin utilizing the line of credit.
When the line of credit is set up, you can begin using it in accordance with your loan agreement. As such, you can request a draw as needed and have the lender place funds into your account of choice. Make sure you repay the borrowed funds according to the terms outlined in the agreement to avoid any fees or penalties.
Where to get a business line of credit
A business line of credit can be obtained from a variety of lending institutions, whether it be a traditional bank, a credit union, or an online lender, such as those in our roundup of the best business credit lines. You also may be able to consult with a broker to review multiple options at once.
That said, the best option for your business will vary based on your preferences as a borrower, inclusive of factors such as branch locations, customer service, and provider-specific features.
Pros and cons of getting a business line of credit
As with any form of business financing, there are various advantages and drawbacks associated with opening a business line of credit. Consider the following to help you determine if getting one is right for your business.
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Alternatives to consider
Getting a business line of credit can allow you to access flexible funding to cover business expenses. However, there are other financing options to consider, such as:
- Business term loans: A term loan offers funds in a lump sum, unlike a line of credit where you can borrow as-needed. This is a good choice if you have a specific amount you need to borrow and don’t require ongoing access to funds. Term loans can be used for common business expenses such as payroll, rent, or other operating costs.
- Credit cards: Similar to a line of credit, business credit cards allow you to make direct purchases without needing to request a draw. They’re a good option to consider for covering short-term or emergency expenses for your business.
- Invoice factoring: If you’re waiting for payments on invoices, invoice factoring allows you to get an advance on those funds. This option is typically easier to obtain than a line of credit and has flexible qualification requirements.
Frequently asked questions (FAQs)
How do I get approved for a business credit line?
You’ll need to shop around for a lender and consider both its lending terms and required qualifications. By reviewing these items up front, you can better your odds of approval by ensuring that you meet the qualification criteria and that the loan terms fit your business needs.
How hard is it to get a line of credit for business?
It varies based on your creditworthiness as a borrower. If your business credit score, revenue, and time in business are less than ideal, you may find obtaining a line of credit difficult. That said, the stronger your qualifications, the more likely you will get better lending terms.
What credit score is needed for a business line of credit?
Credit score requirements can vary depending on the lender. Generally speaking, it’s recommended that a borrower have a score of 650 and above to be considered. However, the higher your score, the better your odds of approval.
How does a business line of credit work?
A business line of credit is a revolving credit facility that allows you to request a draw on funds as needed. The funds are then deposited into your account of choice and can be used for a variety of business purposes, whether it be to cover general expenses, emergencies, or other short-term financing needs.
Borrowed funds have flexible usage and can be repaid over time in accordance with the terms of the financing agreement. Lines of credit for business uses typically have a set lending limit, with only the current balance accruing interest. Generally, any draw made on the line is expected to be repaid monthly, up until the loan reaches maturity when the balance is due in full.
