How Do You Qualify for a Revolving Line of Credit?

By Backd Business Funding, 28 September, 2022

How Do You Qualify for a Revolving Line of Credit?

A revolving line of credit gives your business the agility you need to adapt to challenges and opportunities at a moment's notice. In short, a business line of credit gives you a maximum limit that you can withdraw, and as you pay back what you’ve borrowed, your limit replenishes. This keeps your interest payments as low as possible and allows you to finance your business on your terms. A revolving line of credit can be used to:

  • Purchase or repair equipment

  • Cover payroll during slow periods

  • Stock inventory

  • And so much more

Thinking about preparing to apply for a revolving line of credit? At Backd, you can complete your application in three minutes or less. To qualify, you’ll need to provide your credit score and business financial history.

How Does a Revolving Line of Credit Work?

A line of credit works much like a credit card: your business has a maximum limit they can borrow, and you have the option to borrow (and pay interest on) only a portion of that maximum amount at a time. With a revolving line of credit, you restore your limit as you pay off what you’ve borrowed, which means you’ll consistently have funds available as you make payments.

For a revolving line of credit example, take a look at this hypothetical scenario where  Joe uses this funding option to finance his landscaping business:

To operate his landscaping business, Joe needs to spend a lot of money upfront on equipment. Lawnmowers, weed whackers, leaf blowers, trucks, and trailers all cost a lot. Joe doesn’t have the cash on hand to pay for new equipment upfront. In anticipation of a busy spring season, he decides to invest in an extra team at two of his locations. That means he needs:

  • 2 trucks

  • 2 trailers

  • 2 lawnmowers

  • 2 weed whackers

  • 2 leaf blowers

To meet these costs, Joe decides to apply for a revolving business line of credit with a $120,000 limit. 

Joe’s landscaping business is well established in several locations with consistent revenue, and he has a healthy credit score, so he is approved. He purchases two trucks during the winter for a total of $65,000, which leaves him with a remaining limit of $55,000. To help with marketing, Joe also gets his trucks wrapped to display his logo and contact information, costing $4,000 for both trucks. Now his remaining limit is $61,000.  

Joe is waiting for a new line of lawn equipment to be  released, so he uses his revenue from snow removal services to pay back $30,000. Now his limit is back up to $91,000. Then he buys the lawn equipment he needs, spending $10,000 and reducing his remaining limit to $81,000. 

During this process, Joe never actually took out the full $120,000 he had access to. That means he only had to pay interest on the amount he was currently borrowing instead of the entire limit. This way, he was able to save money by paying less in interest than if he were to borrow a lump sum of $120,000 through a traditional loan.

Do Revolving Accounts Hurt Your Credit?

Applying for revolving accounts only hurts your credit if your lender does a hard pull on your credit score during the vetting process. When applying through Backd, your credit will only be subject to a soft pull, so you won’t be punished for growing your business.

Once you’re approved for a business line of credit, it can actually help your credit score. As you make payments on time, your score will go up, which will make it easier to borrow with higher limits in the future. 

Is a Revolving Line of Credit Good?

The advantages of a revolving line of credit are that they:

  • Provide quick access to the funding you need. Once you’re approved, you don’t have to ask again to spend the money from your line of credit.

  • You can use your funding for whatever you need. Some business loans come with restrictions on what you can invest in, but revolving credit loans don’t.

  • Offer lower interest payments than traditional loans. With a loan, you borrow the entire amount at once, so you’re paying interest on that lump sum—even if you haven’t actually spent it yet. With a revolving line of credit, you only borrow a portion at a time, which means you’re paying interest on a smaller amount even though you have access to the same total funding. 

If you’re an established business looking to grow, then a revolving line of credit could be the right financing option for you.

How Hard Is It To Qualify for a Line of Credit?

A small business line of credit requirements vary from lender to lender, but you will often have to prove that your business is established and earns a sizable annual revenue. Requirements for a business line of credit are typically:

  • An Established Business: In order to qualify for a business line of credit, you’ll need to have been in business for at least two years when borrowing through a bank or 6-12 months when borrowing through an alternative lender. 

  • Meeting a Minimum Annual Revenue: Lenders need to feel confident that you’ll be able to pay back what you’ve borrowed, and most will require that your business’s annual revenue is at least $100,000-$300,000. 

  • A Healthy Credit Score: A credit score of 640 will get you accepted through most lenders, and a score of at least 600 is still considered good. If your credit score is between 500 and 600, you may qualify, but your options will be more limited, and your interest rates will usually be higher. 

For established businesses that need help growing and would benefit from additional flexibility along the way, getting approved is often a straightforward process. However, younger businesses and startups often have a much harder time qualifying for a revolving line of credit because they don’t have the financial history to prove they can make consistent payments yet. 

Backd: Accessible Funding for Growing Businesses

Wondering if your business qualifies for a revolving line of credit? You do through Backd if you:

  • Are located in the United States

  • Have been in business for at least one year

  • Have a credit score of at least 600

  • Earn at least $300,000 in annual revenue

Adaptability is crucial for thriving in a competitive market. Backd gives you the financing you need to respond to the good and the bad of being in business. Apply today in less than 3 minutes.