A Guide on How to Qualify for a Business Line of Credit
In 2024, banks ranked “financial position” as the most important consideration when reviewing small business financing applications, according to the Small Business Lending Survey. If you’re wondering how to qualify for a business line of credit, this gives you a clear idea of what lenders are looking for.
While creditworthiness is an important criterion, many lenders will prioritize assessing your financial statements, debt-service coverage ratio, and liquidity management. However, if you’re applying for a secured credit line, your collateral value might also do the heavy lifting for you.
In this article, you’ll learn more about applying for a business line of credit, including:
The benefits of applying
How to qualify for a business line of credit
How to strengthen your application
3 Benefits of Applying for a Business Line of Credit
A business line of credit is one of the most accessible financing options for small businesses. It allows you to manage your working capital so you can pay for your short-term expenses and make timely investments.
Similar to a business credit card, it’s a type of revolving credit. You can withdraw from it as needed, and the funds will be deposited into your business checking account. The process is as easy as logging into an app or using an ATM card.
Because of its growing popularity, business lines of credit are increasingly offered by banks, credit unions, and online lenders.
Aside from convenience and accessibility, below are some of the other reasons why this funding can be a good option for small business owners.
1. Competitive Rates
Business lines of credit typically have higher credit limits and lower interest rates than credit cards. This makes them ideal for more expensive purchases and time-sensitive investments, such as equipment upgrades or buying inventory in bulk.
A secured line of credit, which is backed by collateral, often comes with lower interest rates than unsecured ones. The higher your collateral value is, the more competitive rates you’ll get.
2. Accessible Eligibility Requirements
Business lines of credit have more accessible eligibility requirements than traditional business loans. While business credit scores are still required, the lender’s primary consideration is usually the borrower’s financial performance in terms of their annual revenue.
This makes the financing easier to secure and simplifies the application and approval process. It can also help a company further establish their credit history.
3. Flexible Repayment Terms
Term loan repayments can be limited to monthly payments, leaving little room for cash flow flexibility. Not to mention that many lenders impose a prepayment penalty if you pay off your loans early.
Meanwhile, business lines of credit providers have more flexible repayment terms. For example, Backd’s Business Line of Credit offers weekly payments in six- or 12-month terms so you have more control over your cash flow.
How to Qualify for a Business Line of Credit
The exact business line of credit requirements will vary depending on the lender, the loan amount, and whether you’re applying for a secured or unsecured business line of credit.
However, here are some of the factors lenders may use to qualify you for a small business line of credit and to determine your credit limit and repayment terms:
Industry and years of operation: Some lenders are open to relatively new businesses, while others prefer established companies, especially in high-risk industries.
Financial performance: Lenders look at your profit and loss statement to determine your financial health. The higher your annual revenue, the higher your chances of getting approved.
Creditworthiness: Your FICO Score and credit history are especially critical for unsecured credit line applications since you don’t have business assets or personal guarantees to serve as backup payment. While most lenders prefer good credit scores, some do consider bad credit. That said, the latter may come with higher interest rates and fees.
Collateral/asset value: If you’re applying for a secured line of credit, your assets influence your credit limit and interest rate. The higher your collateral value is, the more likely you’ll enjoy lower interest rates and longer repayment periods.
Debt management: One of the metrics that lenders consider is the debt-service coverage ratio, which measures your cash flow’s ability to pay current debts. A low ratio can get you flagged as a high-risk borrower.
Business plan: Some lenders require a business plan that details how you will use the funding to meet your business needs. This plan shows that you have realistic goals and growth strategies in place.
Before you submit your application, carefully read through the lender’s requirements and create a document checklist to ensure you won’t miss any important details. You may need to submit supporting documentation along with your application, such as financial statements, credit reports, tax returns, business information, and identity verification documents.
Note that the application process greatly differs between traditional banks and private or online lenders. Banks often require extensive documentation, but online lenders have easier and quicker processes that can have a same-day approval, so explore your options!
4 Tips to Strengthen Your Application
When you apply for a business line of credit with an online provider, it’s pretty much fuss-free, but if you decide to apply with a traditional bank, here are some extra steps you can take to help tip the scale in your favor.
1. Submit a Comprehensive Business Plan
The business plan is where you can demonstrate that you take your growth seriously. Include as many details as possible, such as how much is going to be allocated for expanding your workforce or investing in marketing campaigns. Additionally, include revenue forecasts and a payment plan to show that you’re prepared for financial disruptions.
2. Highlight a Healthy Cash Flow
Since business lines of credit providers prioritize financial performance, ensure you’re on top of your cash flow management. Your cash flow statement should clearly show how much money is coming into your business bank account versus the amount going out. If you had periods of negative cash flow, prepare an explanation for these instances. This transparency sends a signal that you’re trustworthy and accountable.
3. Consider Applying in Person
While most lenders provide the option to apply online, there might be perks to applying in person, especially if you’re already a bank customer. For example, you might be able to negotiate for better interest rates and repayment terms. Plus, you can use that time to ask questions about the product or provide clarifications regarding your application.
4. Gather Additional Supporting Documents in Advance
While the eligibility requirements might be straightforward on paper, the underwriter might call you to ask for additional documents or information to help them assess your application better. Having these documents on hand can help you move the application forward much faster. It also shows you’re willing to provide clarity about your business operations.
Get Alternative Small Business Financing With Backd
Now that you know how to qualify for a business line of credit, you can also consider other financing options. While business lines of credit are a good funding option for short-term expenses and investments, it may be challenging for small businesses to get approved, especially from traditional banks.
The good news is that Backd is making it easier for small business owners to get the financing they need. Our Business Line of Credit provides up to $750,000 and can be used for any purpose. We also offer a Working Capital Advance, which provides up to $2 million in funding that you can repay weekly, semi-monthly, or monthly.
We conduct a soft credit pull to protect your credit score during the application process. Additionally, you can receive approval within as little as 6 hours once you submit your complete application.
Our eligibility requirements include:
$100,000 in monthly revenue
A credit score of 650+
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for two years for a Business Line of Credit and one year for a Working Capital Advance
Apply now to get stress-free financing that supports your success.
