This article is part of a larger series on Business Financing.
A small business line of credit is best used for ongoing expenses like payroll, inventory, and working capital. It has shorter repayment terms and higher interest rates than term loans, and you’re only charged for the amount you borrow. To apply, you’ll need to prepare financial documentation, select a lender, and submit an application.
A fast way to get a small business line of credit is with Bluevine. Their online application requires minimal information, and businesses can be funded in as soon as 24 hours. Bluevine offers lines of credit as large as $250,000, with rates starting at 4.8% and terms up to one year.
The six steps for getting a business line of credit are: determine why you need funding, meet the qualifications and requirements, consider the costs and terms, gather your documentation, compare small business line of credit providers, and submit your application.
1. Determine Why You Need Funding
Business lines of credit are typically used for ongoing expenses such as inventory, payroll, and general working capital.
If you answer “yes” to any of the following questions, then a small business line of credit is a good financing option:
- Is this a regularly occurring business expense?
- Does the business have sufficient cash flow to repay the principal and interest within one year?
- Can I take advantage of the revolving feature for future financing?
- Does my business need access to financing on demand for unpredictable expenses?
If you’re financing a larger project, such as a big piece of equipment that will require payments over several years, an equipment loan may make more sense. Additionally, if you need financing due to unpaid invoices from your business or government customers, then invoice factoring could be a less expensive option for your business in the long term.
2. Meet the Qualifications & Requirements
To qualify for a line of credit, the following minimum requirements and qualifications need to be met:
- Personal credit score: At least 600
- Annual revenue: $50,000 or more
- Time in business: Six months or longer
- Collateral: Blanket Uniform Commercial Code (UCC) filing typically required
- Personal guarantee: Typically required
A blanket UCC filing pledges your business assets as collateral for the loan in the event of default, and it’s typically required. The personal guarantee is a signed promise to a lender, backed by your personal assets, that you’ll repay a loan. The vast majority of lenders will require this. Also, most traditional banks will have higher minimum qualifications for credit score, revenue, and business history than online lenders. While some lenders offer financing to businesses that have been in operation for as little as six months, newer businesses should consider other startup financing options should they have difficulty obtaining a line of credit.
3. Consider the Costs & Terms
The typical terms you can expect for a small business line of credit are:
- Average APR: 20% to 50%
- Credit limit: Up to $250,000
- Repayment term: Typically six to 12 months
- Repayment schedule: Weekly or monthly
Unsecured lines of credit typically don’t exceed $250,000 and have repayment terms of six to 12 months, with both weekly and monthly payments available. If you need a larger line of credit or a longer term, a local bank may be a good option.
Many traditional lenders will review your line of credit on an annual basis and may adjust the credit limit based on business profitability, how the line of credit was used, and any balances that are still outstanding at the time of review. Keep in mind that interest rates and fees vary widely between lenders. Online lenders typically charge a bit more but have easier qualification standards while traditional lenders charge less but have stricter guidelines for approval.
4. Gather Your Documentation
The details you’ll typically need to provide when applying for a small business line of credit are:
- Business name and address
- Personal information including name, address, Social Security number, and income
- Phone number
- Tax ID
- Nature of business
- Date business was established
- Number of employees
- Annual gross revenue
Many traditional lenders will request additional items such as financial statements and the last three years of tax returns for both you and your business. In a few instances, a lender may request accounts receivable and accounts payable aging reports to determine if you qualify. If you need faster funding, an online lender may only request a few months of bank statements, thereby speeding up the decision-making process.
5. Compare Small Business Line of Credit Providers
When deciding whether to work with an online alternative lender, a traditional bank, or a credit union, there are some important factors that small business owners should keep in mind. First and foremost, you’ll need to determine how much you’re going to need and how quickly you’ll need funding. While you can get approved for larger lines of credit with a bank, it’ll typically take much longer to do so. The best lines of credit are also revolving, allowing you to reborrow funds once they’ve been repaid.
Traditional Bank or Credit Union
Your local bank or credit union can be a great place to start applying for a business line of credit, especially if you already have your business checking account with them and have an established relationship. Banks and credit unions typically offer better overall terms and lower interest rates, but the application process will require more documentation than an online lender and can take 30 or more days to get funded. If you’re having trouble qualifying for an unsecured business line of credit, a bank can also offer you an asset-based secured alternative backed by your accounts receivables, inventory, or equipment.
Online or Alternative Lender
If you would like to complete your application online or need access to funding quickly, you should apply for a fast online business loan. You’ll typically receive a smaller credit limit, but the paperwork required is minimal, and you can qualify and get funded as quickly as one business day. While credit line limits are typically advertised up to $250,000, businesses will usually be approved for $6,000 to $30,000.
One good option for a line of credit is Bluevine. Bluevine offers a line of credit up to $250,000 for terms of up to 12 months and both weekly and monthly payments. You’ll need to have at least $100,000 in annual revenue and a credit score of 625 or greater to qualify for starting rates as low as 4.8% of the draw amount.
6. Submit Your Application
Online lenders and many traditional banks will allow you to submit your application entirely online, and it typically takes a matter of minutes to complete. Smaller banks may still require a paper application or may provide you with an editable PDF that can be submitted by email to a lender. Although many traditional banks now offer an online application, you may need to be located near one of their local branches.
Tips on Getting Approved for a Small Business Line of Credit
Getting approved for a small business line of credit depends on meeting basic qualifications around credit, business history, and revenue. Beyond those basic requirements, a few other tips can help improve your odds and manage your expectations about the approval process:
- Have a plan for how you will repay the funds: When you apply, many lenders will ask you why you need a line of credit. It can be for working capital, operating expenses, or to help with cash flow because of seasonal variation in revenue. Make sure you budget in the payment so that you can manage those funds within your cash flow and not hurt your business’s bottom line.
- Boost your credit and business performance: If you haven’t checked your credit score, do so for free. If you find that your score is low or that your business performance is struggling, you can seek out the services of mentors and advisors through SCORE or the Small Business Development Centers (SBDC).
- Be ready to accept less than what you apply for: Lenders don’t always approve the full amount of a line of credit application and will base their decision on your company’s revenues, debt exposure, or lack of history if it’s a newer business. While this is an inconvenience, it does set the stage for a credit limit increase in the future, assuming payments are made on time.
Alternatives to a Small Business Line of Credit
Choosing the right mix of business financing is important to ensure that your business is well equipped to expand and serve your customers. You’ll typically find that your business is best served by taking advantage of several forms of financing for different purposes. Some financing alternatives to a business line of credit are:
- Term loans: When your business needs financing for a big project that requires getting a large advance of funds upfront with longer repayment terms, you should consider getting a term loan. If you need a term loan but still want the option of a line of credit, selecting a lender that can provide both will save you time and effort.
- Invoice factoring: If your business is earning sufficient revenue but your customers aren’t paying their invoices quickly enough, invoice factoring may be an option for your business. Invoice factoring allows you to sell your invoices for up to 90% of their value upfront and collect the remainder minus a factoring fee when the invoice is paid.
- Credit cards: A business credit card can be a better option, especially if the amount of financing you need is less than $20,000, or you regularly make purchases online for your business and a credit card is required for payment. If you make credit card payments on time, you’ll likely save on finance charges and help build your business’ credit. We have a list of recommended small business credit cards that can help you find the best option for your business.
Whether your business needs financing for payroll or regular maintenance, a business line of credit is a great option. When applying, you should have financial information ready for both you and your business and select a lender that’s likely to approve you for the terms and rates you need.