What To Expect When Applying for Business Lines of Credit
Business lines of credit are a popular funding solution for many industries. Small business owners love this type of flexible financing because it makes handling everyday options much easier. You can use a line of credit for anything you would use a credit card for, but with better interest rates and a larger financing amount. What do you need to do to qualify?
What Are the Basic Requirements for Business Lines of Credit?
The specific requirements vary by lender, but most of the time there are general eligibility guidelines you have to meet:
- Revenue (annual or monthly): Lenders care about your average revenue for two reasons. First, they want to make sure your business has a stable income so you can pay back any financing provided. Second, the size of your line of credit is always based on a percentage of your average revenue. Depending on how much your company makes in a month or a year, you may get a line of credit from $5,000 to $100,000 or more.
- Time in business: Often, you need at least a year in business to qualify for a line of credit. Many lenders want to see two years of successful operations. Sometimes, startups can qualify, but it may mean using your personal assets as collateral, which isn’t always a wise idea for first-time entrepreneurs. Unsecured lines of credit are more comfortable in this respect because approval only depends on your credit rating, not existing collateral.
- Credit rating: Every lender checks your credit score when you apply for a line of credit. This helps determine how well you can manage money and what interest rate you qualify for. The minimum credit rating is usually 580 to 600. If you have 680 or above, you can qualify for even better interest rates, and approval is practically guaranteed.
- It’s important to keep in mind that the requirements also vary depending on if you apply for a secured (with collateral) or unsecured (no collateral) credit line.
How Much Funding Should You Apply For?
While the size of your line of credit ultimately lies with the lender, you can request a certain amount when applying. Lines of credit are amazing because you only pay interest on the funds you use, not the full amount approved. Keep in mind that you never want to max out a line of credit.
If you know you’re going to need $10,000 to purchase inventory every few months, try to request a line of credit that’s at least double that; $25,000-$30,000 would be ideal. That way, your debt-to-income ratio stays low.