How To Get a Small Business Line of Credit in 5 Steps
This article is part of a larger series on Business Financing.
The process of how to get a business line of credit requires five steps—determining your needs, understanding your options, reviewing your eligibility, finding a lender, and submitting an application. In this article, we explain not only what is involved but also provide some tips on how to get through the loan process quickly.
If you’ve already decided that a line of credit is right for you, consider checking out Bluevine. We recommend this provider because it offers up to $250,000 in financing with rates as low as 6.2% and funding speeds in as little as 24 hours.
Step 1: Determine Your Needs & Acceptable Loan Terms
The first step in how to get a business credit line is to ask yourself how you plan on using it. This includes analyzing what types of expenses you may need it for, how often you’ll use it, and how it will help your business.
Knowing these things will help you determine what loan terms are best suited for you. Loan terms can include things like the maximum credit limit, length of repayment, and minimum draw amounts.
Here are a few things to consider to figure out how your business needs translate into the loan terms you should be seeking:
- How often do you plan on using the line of credit? Some small business line of credit providers charge inactivity fees if you don’t use your loan for a certain period of time. If you don’t plan on using it at all, you may want to avoid providers that charge this type of fee.
- How big of a credit limit will you need? Consider the maximum credit limit you might need based on the types of expenses you’ll be using it for. Review how often you’ve run into unexpected expenses. Keep in mind that regardless of how well-qualified your business is, some providers have hard limits for how much it will lend to any one business.
- How quickly do you plan on paying off the loan? The length of your loan repayment can affect your monthly payments—so you’ll want to ensure that you won’t have issues making timely payments. Also, be aware of prepayment penalties. If you plan on paying off your loan fast, consider avoiding providers that charge a prepayment penalty.
- What will be your typical draw amount? Think about how much funding you’ll need each time you want to draw from the line of credit. Some lenders charge a fee or do not allow any withdrawals that are less than a certain dollar amount.
Step 2: Understand Your Loan Options
A small business line of credit has two options: a secured and an unsecured line of credit. While the details of the rates and terms available on each can vary from lender to lender, each has its own set of pros and cons that generally hold true regardless of which provider you choose.
Secured | Unsecured | |
|---|---|---|
Rates & Fees | Lower | Higher |
Maximum Credit Limit | Can be higher if supported by the value of collateral | Lower |
Qualification Requirements | Easier | More difficult |
Collateral Requirement | Required | Not required |
Personal Guarantee | May be required | May be required |
Funding Speed | Slower | Faster |
A secured line of credit is backed by collateral, which can be taken by a lender in the event you default on the loan. As a result, this type of loan represents less risk to the lender because it has more options to recoup its potential losses. This level of risk is represented in the form of lower interest rates. However, since the value of the collateral must be verified, funding speeds tend to be slower.
Meanwhile, an unsecured line of credit is not backed by any collateral, making it a greater risk for a lender. Since no collateral needs to be verified, funds can be disbursed more quickly compared to a secured line of credit. Interest rates tend to be higher, and lenders are likely to focus more on your ability to repay the loan.
Step 3: Check Your Eligibility Against Common Qualification Requirements
The next step is to figure out where you stand when it comes to common qualification requirements. This is an essential step because the best loan for you must also be one that you’re eligible for.
We’ve outlined typical qualification requirements below. However, keep in mind that the specific eligibility criteria can vary depending on the lender you choose, so don’t be discouraged if you fall short of any of these items.
Typical Qualification Requirements | |
|---|---|
Credit Score | 600-plus |
Time in Business | 6 months |
Annual Revenue | $100,000 |
Collateral or Personal Guarantee | Both may be required |
Step 4: Find & Choose a Lender
You can get a small business line of credit from many different types of lenders. This includes banks, brokers, online lenders, and credit unions. Each has its own set of pros and cons, and we recommend checking out multiple lenders before deciding on one. For an easy time picking lenders, check out our recommendations of the best small business lines of credit.
Below, we’ve outlined the typical characteristics of the different types of lenders, as well as some tips on how you can choose a provider.
How To Choose a Lender
When choosing a lender, you should consider features specific to the loan. You should also take into account how the lender conducts business, such as its hours of operation and customer ratings.
Loan items to consider | Lender items to consider | ||
|---|---|---|---|
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Step 5: Submit a Loan Application & Provide the Requested Documents
Once you’ve chosen a lender, you’ll need to submit a loan application. Loan applications will require you to provide information about yourself and your business. Most providers allow you to do this online, while some may require you to call or visit a physical branch.
After submitting your application, you’ll need to provide supporting documentation for things like your credit and business finances. Some lenders ask for a standard set of items as part of this initial loan application. Others may not ask for anything upfront and will instead review your application to first discuss your business needs and goals with you.
The exact documentation you’ll need to provide will vary based on your business circumstances and the provider you choose. Below is a list of commonly requested items. Having these prepared and ready to send to a lender can help expedite your loan funding speed:
- Tax returns (business or personal tax returns as applicable)
- Profit and loss (P&L) statements
- Balance sheets
- Business bank statements
- Loan statements
- Lease agreements
Before you submit an application, we recommend reading our tips on how to get a small business loan. Many of the tips we provide can be combined with our business line of credit-specific advice and should help you get through the loan process more quickly.
What To Expect After Applying for a Line of Credit
Once you have provided the lender with all of the documents it has requested, your application will go through one final review to determine what you can be approved for.
1. Underwriting of the Loan
Underwriting is a lender’s process of conducting a final review of your loan application to determine if it meets the eligibility criteria. All aspects of your loan application will be reviewed, and it’s not uncommon for lenders to request clarification or additional information from you. Underwriting typically takes one to three days.
2. Reviewing the Approved Loan Terms
If you meet the lender’s eligibility criteria and you are approved, you’ll be presented with loan terms to accept, which include rates, fees, and length of repayment. Before accepting, you should review the agreement in its entirety, as it may also outline factors like prepayment penalties, early payoff fees, minimum draw amounts, and renewal options.
3. Signing Final Loan Documents
If you accept the loan terms offered by the lender, you can sign the final paperwork. Once the paperwork is fully executed and reviewed by your lender, funds will be disbursed and will typically be available for your use within 24 to 48 hours.
Alternatives to a Small Business Line of Credit
A small business line of credit will allow you to regularly draw funds to cover business expenses. However, there are other financing options available if you don’t need this flexibility, prefer to pay for expenses directly, or have difficulty getting approved.
- Term loans: A term loan is any loan that issues funds in a single lump sum. Unlike a line of credit, you cannot draw additional funds once loan proceeds have been disbursed. It can be a good option if you do not have a recurring need for funding and know exactly how much you need to borrow. Our list of the best working capital loans has several term loan options that can be used for a variety of daily expenses such as payroll, rent, and operational costs.
- Credit cards: Although similar to a line of credit, a credit card allows you to make purchases directly with the card rather than requiring you to first draw funds to cover expenses. You can get a revolving credit limit of up to $25,000 or more, making it a good option for small to medium-sized business expenses. Head over to our guide to the leading small business credit cards for some options, or learn more about the differences between a credit card vs business line of credit.
- Invoice factoring: If you have outstanding invoices and are awaiting payments from clients, invoice factoring can get you an advance on those funds. This type of financing is also easier to get compared to a line of credit. See our top-recommended invoice factoring companies for options.
Frequently Asked Questions (FAQs)
In most cases, you can get a line of credit anywhere from 24 to 72 hours. This depends on the complexity of your business, the terms you’re seeking, and how quickly you respond to the lender.
No, getting a line of credit is not difficult, as there are many providers that cater to businesses in a variety of circumstances. You can find lenders that can fund startups, businesses with bad credit, and companies that have low revenue earnings. For our recommendations, see our guide on the best small business line of credit providers.
A line of credit could be right for you if you want access to funds in the event of emergencies, unexpected expenses, or temporary shortages in cash flow. You can learn more about whether this could be a good fit through our guide discussing what a business line of credit is.
Bottom Line
Now that you know how to get a business line of credit, you can not only save time but also improve your chances of getting approved at a lower rate. A business line of credit can be useful for a number of business expenses, whether it is for recurring or one-time needs. Our guide to the best working capital loans contains several line of credit providers because of the ability to use funds for daily expenses, payroll, rent, operational costs, and much more.
