What is a business line of credit?
A business line of credit (LOC) is a revolving amount of money lent to a business owner with interest fees charged upon repayment. LOCs are a form of debt financing, where a business owner pays back a borrowed amount of money over time. A line of credit is different from other kinds of debt financing, usually offered by traditional financial institutions like banks or credit unions. The rate of interest you’ll pay can be either fixed or variable, depending on the lending institution.
A LOC is different from a regular loan in that it's not a fixed amount granted to your business as a lump sum, but more like a credit card. With a LOC, a small business owner is granted a pre-approved maximum limit of funding – a credit limit. You may choose only to use part of that amount, and you’re charged interest only on what you borrow, not the entire approved amount. Somewhat like a business credit card, a LOC often has a much higher credit limit and may not be accessible by simply using a card.
Business LOCs are one of the least expensive funding available to small business owners. If your business qualifies for one, it’s definitely worth considering because it grants you access to business cash flow when you need it at a lower cost.
What do I need for a line of credit application?
Be aware that the processing for a line of credit application can take quite some time. Unlike a small business or term loan, it can take up to a month to find out if you have been approved for a business LOC so it’s in your best interest to prepare in advance to help speed up the process. In addition to a business bank account, the documents you’ll need to gather include:
- Your business registration or license
- The last two years of financial statements for your business
- Bank account statements from other financial institutions for the last two years
- Investment and/or deposit statements for accounts at other financial institutions
- Bank statements from other financial institutions for the last three months
- Detailed bills of sale or purchase agreements, if you’re buying business assets
You’ll also need to collect personal information, including:
- Two forms of valid government-issued photo ID
- Tax returns for the past two years
- The names, addresses, and occupations of any individuals that have greater than 25% interest in your business
Where can I apply for a line of credit?
You can apply for a line of credit at most banks and credit unions – it may be easiest to go to one that you already have an account with.
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Once you’ve decided to get business financing and you have your documents prepared, contact your preferred bank to apply for a line of credit. Depending on the institution, an online application may be available.
What if I don’t meet the requirements for a line of credit?
Consider your situation
Banks will usually tell you why your application was declined, so you can use this information to your advantage. Consider what you can do to change the reason your application was declined – here are some possible reasons you may need to address:
- Purpose of the loan doesn’t meet the bank’s criteria
- Your industry is considered too risky
- Your personal credit score is too low
- There was negative performance reported on your commercial bureau report
- Your bank statements indicate an insufficient amount of revenue to make the monthly payments, even at the maximum amortization period
Look for a private lender
A private lender will generally have less strict lending requirements, and your personal credit score is not the only criteria considered for approval. And since you’ve already collected all your documentation for the bank, you can just send the same documents to private lenders. Most private lenders don’t require as much documentation to make lending decisions anyway; you may need as little as your bank statements, a government issued ID, and a voided check. Private lenders will often have easy online applications with fast (or even instantaneous) quotes.
To get a business line of credit, you’ll most likely need to go to one of the big banks. If you can apply at a bank you’re already banking with, that can cut down the application time a lot. Preparing your business and personal documents ahead of time can also make things move along faster.
Talk to a business advisor at your bank to work out the terms and conditions of repayment. And even if you don’t meet their requirements for a line of credit, you can still try a private lender to see if you can obtain short-term funding, or look at other loan options.