A Guide to Business Line of Credit Requirements and Fees
Securing a business line of credit for your firm can help you better manage your company finances, handle unexpected costs, and take advantage of brand-new opportunities. However, you need to make sure that you understand the business line of credit requirements from lenders to improve the chances that your application will be approved.
In this article, find out what business lines of credit are, the six criteria you may need to meet, and what upfront and ongoing costs you might have to pay for your facility.
What Is a Business Line of Credit?
A business line of credit is a type of revolving credit, so it works similarly to a business credit card. With this form of flexible business financing, you can borrow any amount of money you need up to the credit limit set by your lender, and you will only owe interest on the amount you borrow. Once you pay the money back, it becomes available for you to borrow again.
As an example, let’s say you have a $50,000 business line of credit and withdraw $10,000. That means you now have $40,000 available on your business line of credit, and you will make repayments plus interest on the $10,000 you borrowed. As you pay down your balance, your credit limit will go back up. So if you pay back $2,000, your credit limit will increase to $42,000 and be available for you to borrow again in the future.
What Business Line of Credit Requirements Do Lenders Need You to Satisfy?
There are six main business line of credit requirements you may need to satisfy for your application to be approved. Remember that each lender has its own eligibility criteria and not all of the following requirements may apply.
1. Time in Business
Almost all commercial lenders require you to have been in business for a minimum length of time. Some lenders may be happy with one or two years’ history, while others may be more cautious and only want to work with established businesses that have five years’ history or more.
For startups and newer businesses, you might have a better chance of being approved for an SBA Express Loan, which can be taken out as either a standard loan or a small business line of credit. But keep in mind, while the SBA does accept applications from startups, the bank or credit union that issues the loan has the final say and may have a minimum time in business requirement.
2. Credit Score and History
Demonstrating your creditworthiness is also a key business line of credit requirement you have to meet. A lender will want to look at your credit score and credit history to ensure that you’ve successfully borrowed money and made monthly payments. This makes you a less risky borrower in their eyes.
When assessing your application, the lender may look at your personal or business credit report through credit bureaus like Dun & Bradstreet, Equifax, and Experian.
Lenders will often have a minimum threshold for your small business credit score and/or your personal credit score (normally your FICO Score). In addition to using this information to make an approval decision, your credit score may be used to determine your interest rate. You’re likely to pay higher interest rates the lower your credit score is.
If your credit score is lower than what traditional banks or credit unions will accept, you have two options.
Online lenders: Underwriting teams at many online lenders will consider your application, as they often require lower minimum credit scores than mainstream lenders.
SBA Express Loan: If your credit rating is preventing you from being approved elsewhere, applying for an SBA Express Loan, as mentioned above, may help. The SBA underwrites half of the value of the facility. In other words, if you default, the lender can get up to 50% of the amount still owed back from the SBA.
3. Health of Your Business
Lenders want to know that they’ll get their money back, and there are various ways you can help convince them when applying.
Some lenders may simply want to see that your business is bringing in a certain amount of money each month. For example, when applying for a business line of credit with Backd, your business needs to have $100,000 in monthly revenues.
But traditional lenders may want much more from borrowers to meet their business line of credit requirements. You may be asked for your:
Business financial statements: This includes documents like cash flow statements, profit and loss statements, balance sheets, income statements, statements of shareholders’ equity, and statements of retained earnings.
Tax returns: You’ll need these for both yourself and your business, as this gives lenders visibility into your financial history and allows them to verify your annual revenues and other metrics.
Bank statements: Lenders will want to see your business bank account statements, especially from your business checking account to determine your level of revenues and general business expenses.
4. Business Plan
When you apply for a line of credit, lenders need to see that you have a robust business plan. Make sure your plan is clear, detailed, and well-organized. It should show how your business will be able to grow sustainably from the introduced funds and repay the loan from the additional revenue created.
Important things to include are:
Financial projections: Explain your business expenses, how you will use the loan, and include a backup fund for unexpected costs.
Business goals: Describe your specific goals and how you plan to achieve them. A roadmap with specific milestones allows you to measure progress.
Industry knowledge: Show that you understand your industry, including trends, challenges, and how your business fits in. This shows you are prepared to handle any issues and succeed.
5. Collateral
If you want lower interest rates on your facility, you run a new business, or you have a poor credit rating, you could apply for a secured business line of credit.
This requires small business owners to offer collateral to lenders that they can seize if the borrower fails to meet their obligations. Collateral can include business assets like accounts receivables and commercial real estate.
Secured business lines of credit are much less risky to lenders than unsecured business lines of credit. That’s because they have something to sell to get their money back if you can’t make your repayments.
6. Personal Guarantee
Another business line of credit requirement for some lenders’ application process is a personal guarantee. If your business fails and is unable to repay the facility, this gives lenders the right to pursue you personally for the debt. This can apply to secured business lines of credit too.
Let’s say that you have defaulted on your line of credit and your lender has seized the assets you offered as collateral. However, the money they realized from the sale was not enough to cover the outstanding balance on your facility. In these cases, your lender may still come after you for whatever money is unpaid.
Fees — The Other Business Line of Credit Requirement
While most business line of credit requirements are related to the approval process, fees are another requirement to be aware of before you sign on the dotted line.
Fees will vary from lender to lender, but here are some of the more common ones:
Origination fee: This one-time fee is charged when the loan agreement is signed and your line of credit is initially set up. It’s normally priced at 1-2% of the credit limit.
Draw fees: Some lenders charge a fee each time you draw funds from the line of credit. These can be up to 2% of the value of the capital withdrawn.
Annual fees: These are charged yearly for the privilege of having the line of credit available and can range from $50 to $500, depending on the lender and the credit limit.
Maintenance fees: These fees are for keeping the account open and can be charged either annually or monthly. This is similar to the maintenance fees on some credit cards.
Late fees: If you make a late payment, your lender may charge you a late fee, which can be up to 5% of the overdue amount. Lenders make this charge to encourage timely payment.
Inactivity fees: Many lenders may charge an inactivity fee if you don’t use the line of credit frequently enough. Some may close your account for periods of prolonged inactivity.
Apply for a Business Line of Credit With Backd
Business lines of credit offer an attractive alternative to traditional loans. They provide you with the flexibility you need to manage cash flow efficiently, cover working capital and unexpected expenses comfortably, and seize new business opportunities when time is of the essence. But be aware that there are varying business line of credit requirements, which you’ll want to consider when choosing a lender.
When you apply for a business line of credit with Backd, you can get up to $750,000 within 24 hours of making your application. The approval requirements are simple and straightforward:
$100,000 monthly revenue
625+ credit score
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for two years
Apply for funding with Backd today.
