A business line of credit can be an incredible source of working capital for small business owners. Instead of providing you with a lump-sum amount up front like a term loan, you’ll get a revolving credit line that you can use, pay off and use again over a predetermined period.
If you’re considering this financing option, however, it’s important to know that business line of credit requirements can vary from small business loan requirements. What’s more, they can also vary from lender to lender. Here are some that lenders consider:
- Personal credit score
- Business credit score
- Business debt-to-income ratio
- Time in business
- Annual revenue
As you consider your options, here’s everything you need to know about business line of credit requirements.
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General business line of credit requirements
When you apply for a business line of credit, lenders will look at several different factors. While your goal is to get the funding you need, the lender’s is to protect their “investment.” If your business is considered too risky of a borrower, then you might have a hard time qualifying for a line of credit.
While the actual business line of credit requirements can vary by lender, as with term loans, here are some of the factors they may consider.
Personal credit score
Because it’s your business that’s borrowing the money, you may be wondering why your personal credit score is considered at all. It’s because business lines of credit often require a personal guarantee — that is, you’ll be personally responsible for paying back the debt if your business can’t.
To ensure that you can make good on the personal guarantee, lenders will typically run a personal credit check. It’s possible to get a business line of credit with a poor credit score, but your options will be limited, and you may end up with a super-high interest rate.
As a result, it’s best to have a good credit score or better, which means having a FICO credit score of 670 or higher.
Business credit score
In addition to running a personal credit check, most lenders will also check your business credit score and reports. If your business doesn’t yet have a credit history or it’s rather new, the lender will rely mostly on your personal credit score.
If, however, you have an established business credit history (good or bad), lenders will use it to help determine the risk of lending to your company.
To find out where you stand, you can check your business credit scores with Nav, as well as your credit reports with Dun & Bradstreet, Experian and Equifax.
Business debt-to-income ratio
Your personal and business credit scores are important elements lenders consider during the underwriting process. But they’re far from the only considerations.
Another important factor is your debt-to-income ratio. This figure is a result of dividing your gross monthly income by your total monthly debt obligations. The more of your cash flow that’s going toward debt payments, the less likely it is that you’ll be approved for another loan.
In general, it’s best to keep your debt-to-income ratio under 36%, but some lenders may offer lines of credit with a debt-to-income ratio of up to 50%.
While the debt-to-income ratio may be used for your personal cash flow and debt, a similar ratio that lenders might use for your business is the debt service coverage ratio. With this metric, lenders divide your net operating income for the year by your current liabilities (due within the next 12 months).
Ideally, your debt service coverage ratio would be above 1.25, which means that your operating income is 125% of your current liabilities. The better the ratio, the likelier it is that you’ll get approved with favorable terms. It is possible to get approved with a lower ratio, but it may not be the best line of credit option.
Time in business
While checking your credit and current debt relative to your income is common for both personal and business line of credit requirements, time in business is unique to the latter.
Small businesses have a high failure rate. According to the U.S. Small Business Administration, roughly one-third of all businesses don’t survive two years, and only half make it to the five-year mark.
With repayment terms that go longer than five years, small business lenders are understandably cautious about lending to brand-new companies without a track record.
The time in business requirement can vary from lender to lender, but most will typically want to see that you’ve successfully run your business for two years or longer. Some lenders may have less strict guidelines, allowing you to apply if your business is at least one year old, but in most cases, you’ll have a hard time finding a good line of credit if your company is newer than that.
If you’ve managed to keep your business open for a couple of years or more, the likelihood that your company is creditworthy increases. However, business lenders also want to know that you have the ability to make your monthly payments based on your revenue.
Again, requirements can vary from lender to lender, but you’ll typically need at least $50,000 in annual revenue for some online lenders, and possibly even more for traditional business lenders.
Having strong revenue sources over time — you may be required to show your last two years’ worth of tax returns — shows that you’re capable of maintaining the cash flow required to pay back your business line of credit.
Some industries are riskier than others when it comes to running a business. Restaurants, retail, insurance, alcohol and financial services are all considered risky industries because you may have a higher chance of failing.
That said, it can help if you have experience in the industry prior to opening the business. For example, a business owner who has successfully run one or more businesses in the industry prior to their current one would show less risk to a prospective lender than someone who’s new to the industry.
If you run a business in a high-risk industry, it doesn’t mean you’ll automatically be denied, even if you don’t have previous experience. However, some lenders may choose to pass on the opportunity, giving you fewer options.
Business line of credit requirements for different lenders
As previously mentioned, each lender has the right to choose its own criteria for determining whether you qualify for their business line of credit. Here are some examples of major business lenders and what to expect from their requirements.
Business line of credit from Chase
The national lender offers business lines of credit from $10,000 to $500,000 with five-year renewable repayment terms. The lender doesn’t provide exact information about what’s required to get approved. However, it does disclose that it considers your banking relationship, credit history and collateral.
This suggests that having an existing business banking relationship with Chase will help your chances of getting approved. Also, like other national business lenders, Chase may be looking for a strong credit history instead of offering business lines of credit to business lenders with lower credit scores.
Because the lender considers collateral in its underwriting process, you may have a hard time getting an unsecured line of credit. If you’re looking for that, consider other options.
Finally, note that Chase only offers business lines of credit in the following states: AZ, CA, CO, CT, FL, GA, ID, IL, IN, KY, LA, MA, MD, MI, NJ, NV, NY, OH, OK, OR, TX, UT, WA, WI, and WV.
Business line of credit from Wells Fargo
With a Wells Fargo business line of credit, you can have a credit limit between $5,000 and $100,000 with an unsecured or secured line of credit, or between $100,000 and $500,000 with a prime line of credit. There’s also an SBA-backed line of credit that allows you to borrow between $5,000 and $50,000.
There’s a one-year draw period for the lines of credit, after which the loan amount will be amortized over five years as a term loan if it isn’t renewed.
Wells Fargo requires business owners to have at least two years in business to qualify, but the lender doesn’t specify any other requirements.
If you’re eligible for the lender’s SBA-backed line of credit, however, you can get approved with less than two years in business and with a less-than-stellar credit score.
If you don’t qualify for the SBA-backed line of credit, but your credit history isn’t in great shape, you may be able to get the secured line of credit by using a Wells Fargo savings or certificate of deposit account as collateral.
Bank of America business line of credit
To qualify for this bank’s unsecured business line of credit, which has a credit limit that goes from $10,000 to $100,000, you need to meet three hard eligibility requirements:
- Two or more years in business under the current ownership
- $100,000 in annual revenue or more
- A FICO credit score of 670 or higher
Like the other options available, the Bank of America business line of credit offers annually renewable terms. Also, note that if you’re a Bank of America Preferred Rewards for Business member, you can qualify for interest rate discounts from 0.25% to 0.75%.
Capital One business line of credit
With Capital One, there’s not a lot of information the lender discloses publicly. Credit lines start at $10,000, for instance, but there’s no maximum listed on the bank’s website. Also, the repayment terms can vary based on your situation.
The lender doesn’t offer any information about what it takes to get approved for one of its lines of credit, other than to say that normal credit standards apply. However, it is noteworthy that you don’t have to provide financial statements if your line is $50,000 or less.
Line of credit from Kabbage
The Kabbage line of credit limit goes up to $250,000, which you can repay over six, 12 or 18 months for short-term working capital. While the lender considers several factors, there are some minimum eligibility requirements that you need to meet to get approved.
That includes at least one year in business and $50,000 in annual revenue or $4,200 per month over the last three months. The lender doesn’t have a specific minimum credit score requirement.
OnDeck business line of credit
With OnDeck, lines of credit range from $6,000 to $100,000, with weekly payments of up to six months per draw — it’s worth considering for extremely short-term working capital needs. To qualify for a loan with the online lender, you need at least one year in business, a FICO credit score of 600 or higher, and $100,000 in annual revenue.
That said, OnDeck’s typical customers have three or more years in business, a FICO score of 650 or above, and $300,000 or more in annual revenue. Keep these figures in mind along with the minimums as you consider your chances of getting approved with favorable terms.
Fundbox line of credit reviews
A Fundbox line of credit can go as high as $100,000, which you can repay over 24 weeks. To qualify for a loan with the online lender, you must:
- Have at least two months of activity in a supported accounting software or three months of transactions in a business bank account.
- Have a personal credit score of at least 500.
SBA business line of credit rates
With a CAPLine, you can get up to $5 million in revolving credit, which you can repay over up to 10 years.
The business line of credit requirements for a CAPLine are similar to that of an SBA 7a business loan. That includes a debt service coverage ratio of 1.25 or higher, a credit score of at least 680 and collateral. That said, actual requirements can vary based on the lender you’re applying with.
The bottom line
Business line of credit requirements can vary depending on where you look, but so can the terms of the financing option. If you’re looking for a line of credit with relaxed credit standards, you may end up paying for it in the form of higher interest and fees.
As you consider the business line of credit requirements, take some time to shop around and compare rates, terms and requirements from several lenders before you settle on one. Also, consider business loan options as an alternative, depending on your needs.
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