Business Line of Credit Requirements

Whether you're a small or midsize business, it's important to have some cash for unexpected needs or scaling purposes. For most businesses, this cash comes from loans. However,  statistics show that a large number of loan applications are declined due to multiple reasons, including excessive existing debt, insufficient collateral, low credit scores, and weak business performance.

A business line of credit is an alternative to traditional loans for businesses of all sizes. In fact, according to the  Federal Reserve, business lines of credit are among the top three financing options chosen by business owners.

However, before you can apply for one, you need to be familiar with the business line of credit requirements. In this guide, we'll go over these requirements and help you determine whether you need a business line of credit to fit your unique business needs and proposed goals.

What Is a Business Line of Credit?

A business line of credit is a type of revolving credit that provides your business with a set limit that you can borrow against. Unlike conventional loans, a business line of credit is more flexible. You can borrow and repay as often as you like as long as the total balance doesn't exceed the credit limit - similar to how a traditional credit card works.

Most businesses get a line of credit to secure short-term funding. These funds are mainly used to provide financing for payroll or other expenses, such as an increase in inventory.

Is It Hard to Secure a Business Line of Credit?

If you're a new business, it can be relatively hard to get a line of credit because traditional lenders, like banks, require you to be operational for a few years and show strong finances. Apart from that, it's not an overwhelming uphill battle to get a business line of credit as long as you know the requirements and follow the process correctly.

Plus, you can get a business line of credit much quicker than a traditional loan because there are often fewer steps, and the process is not as arduous. The best part is that you're charged interest only for the amount you use.

For example, if you are approved for a line of credit of $70,000 but use only $50,000, the interest will be charged on only the $50,000. That's what makes a line of credit an ideal option for small businesses that can't afford to pay high amounts in interest payments.

Should I Get a Business Line of Credit?

You should get a business line of credit if you are seeking more flexibility than what a traditional loan can offer. As a small business, you might have many capital-demanding needs, such as expansion and scaling. You may also want to hire more staff for the holiday season or renovate your workplace.

A business line of credit can finance all these expenses, as long as they are within the credit limit. Businesses that don't want to pay high amounts in interest should get a line of credit rather than a traditional business loan.

Sometimes, it's hard for small businesses to get traditional loans because they do not fulfill the requirements. In that case, a business line of credit is the ideal option for you. It can also help improve your business's credit score, provided that you use it responsibly.

What Are the Business Line-of-Credit Requirements?

Once you've decided that your business needs a line of credit, the next step is to understand the requirements so that you can prepare the paperwork and determine your eligibility. Typically, lenders need the following information:

• Personal information: The lenders will need the name, ID, and Social Security number of the business owner.
• Business information: You also need to provide important business information, such as the business's name, industry, entity type, and tax ID number.
• Tax returns: You'll have to provide tax returns for both your personal and business accounts.
• Credit scores: The lenders will ask for your and your company's credit scores. Your credit history provides insight into your creditworthiness and shows the lenders how likely you are to default. Typically, most lenders want you to have a personal credit score of at least 680, but some may accept a credit score as low as 600. Do note that if you have a higher credit score, you're more likely to get approved.
• Financial information: One of the most important business line-of-credit requirements is your financial information. This includes balance sheets, profit or loss statements, bank statements, annual revenue, and more.
• Legal documents: If your company is a partnership, lenders will require legal documents pertaining to this setup.
• Debts: The lenders will also want to know about your existing debts. They will use this information to determine how likely you are to be responsible with your line of credit.

The exact requirements of a business line of credit depending on the lender you've chosen. Banks typically require more information than newer fintech companies and other online lenders.

Banks also tend to look for strong business revenue. Depending on the bank you select, the lender may require that your business be operational for a few years to qualify for a line of credit. You should have been in business for at least a year or two.

Some lenders will approve your line of credit even if you've been operational for just six months. Make sure you check the requirements beforehand to determine whether you are eligible to apply for the line of credit.

Secured vs. Unsecured Business Lines of Credit 

With a secured line of credit, the lender has a lien against a certain asset of the borrower. The asset, in this case, is the collateral, which will be liquidated or seized by the lender if the borrower defaults on their payment.

With this collateral in place, lenders can feel more comfortable offering lower interest rates and higher credit limits for secured lines of credit. Meanwhile, an unsecured business line of credit, like the one offered through Funding Circle,  does not involve collateral. 

Due to this, it's harder to qualify for an unsecured line of credit because there's a greater risk for the lender. You'll be eligible for an unsecured business line of credit only if your company is well-established and has significant annual returns.

If you're a startup, you may not have a valuable asset that could work as collateral. Therefore, an unsecured line of credit will be your only choice. But keep in mind that you'll have lower borrowing limits and a higher interest rate.

But if your business has an asset that could serve as collateral for a line of credit, you can use it to lower your interest rate and borrow larger amounts. It's important to be careful, because if you're irresponsible with the line of credit, you could lose your business assets. Here are the pros and cons of both types of lines of credit to help you make a decision:

Line-of-Credit Type SecuredUnsecuredProsLower interest rates Longer repayment terms Shorter procedures Higher borrowing limit No collateral required No risk of losing a business asset Ideal for smaller sums of money Cons Collateral required Greater risk of losing the collateral in case of irresponsible handling of the line of creditLonger proceduresHigher interest rates Smaller borrowing amounts  

How to Get Started With Funding Circle

Do you want to secure a business line of credit through a trusted and understanding lender? Funding Circle specializes in providing revolving, unsecured, Business Lines of Credit  to help small businesses thrive through their network of partner lenders.
Secure funding from $5k-$250K after approval, and enjoy no monthly maintenance fee.  

Here's how our process works:

• Check your eligibility through our website in less than a minute. Don't worry; there will be no effect on your credit score*.
• If you're eligible, apply online in minutes by providing your personal and business information.
• We make a decision in as little as 24 hours after documents are submitted. If approved, you'll get a tailored quote from our side.
• Once you accept the quote, get  the funds in your account within 24-48 hours.

How simple is that? Whatever your business needs may be, you can count on Funding Circle to provide quick, hassle-free loans to finance your small business.  Apply today, and be ready for tomorrow!