Applying for a Line of Credit in 4 Simple Steps

How to Apply for a Business Line of Credit?

A line of credit is one of the most flexible forms of funding for small businesses. You can utilize a business line of credit for working capital, cover cash flow issues, or finance an emergency or unexpected opportunity. Besides, compared to some other forms of funding, like traditional business loans, a business line of credit can be more accessible for business owners with bad credit and startups.

If you have decided that a business credit line is the right funding solution for your business, you might now be wondering how to apply a business line of credit. Fortunately, we are here to help. In this feature, we will outline the four simple steps you can follow to learn how to apply a business line of credit for your business.Let us get started.

Step 1: Find out if your business is qualified

Generally, the most accurate way to find out if you are eligible for a business credit line is to apply; however, you would not want to apply to many lenders only to get rejected or get a disappointing offer. To get a fast pulse on if you are qualified for financing, consider the elements below:

Annual/ monthly revenue

To evaluate if you can pay back your credit line, lenders will look at your annual or monthly revenue from your income statements and your revenue trajectory over a period of time. Your annual revenue is one of the essential metrics lenders look at; when they see the sales growth month after month, it depicts that you know how to run your company and execute on your business plan. This makes lending institutions more likely to give you a loan and makes them more likely to gradually accelerate your credit line to support the growth of your business.

Credit score

Most lenders will look at your business and personal credit score to figure out your business’s riskiness. The stronger your score (680 is often the cut-off for banks), the more options you have. Nonetheless, just because you have a bad credit score does not mean you will not be eligible for a business line of credit at other lenders.

The history of the business

Once you apply for a business line of credit, lenders will want to know how long your business has been operating. Banks look for businesses that have been in existence for at least two years. If you are a new business (between three to twelve months old), online lenders are a better option since they are more inclined to take on the risk of lending to younger businesses.

Different types of credit lines

There are many kinds of business credit lines. Ona significant difference is credit lines with long or short repayment terms:

  • Typically, long repayment terms are credit lines with repayment terms over twelve months. Longer repayment terms are sensible if you need more time to pay off your credit line or you need to lower monthly payments.
  • Short repayment terms are business credit lines with six to twelve months repayment terms. These terms are ideal if you are looking to pay off your line of credit faster, and you need to save more in interest potentially.

A short-term business line of credit

If you seek a business line of credit with short repayment terms, it is worth applying to online lenders. Generally, online lenders are a better option for businesses looking to save time on the application process and need access to money on-demand. Besides, since online lenders offer shorter repayment terms, the qualifications are nor as rigid.

When you apply for a loan from an online lender, you will often get a decision within one to two business days. To apply to an online lender, follow the following steps:

  1. Apply online: For lending institutions with shorter repayment terms, they generally have an online application procedure that takes at most five minutes to finish.
  2. Upload your statements: online lenders do not require much documentation; at most, you will need to upload three months’ worth of bank statements. If they require more information, they might ask for your tax returns and debt schedule.
  3. Get a decision: after you have submitted an application, you should get a decision within one to two business days.

The long-term business line of credit

Suppose you want to get a business line of credit with longer repayment terms. In that case, you should apply to a traditional bank simply check your credit score and business financials, get all your documents together, then apply and wait.

Step 2: Analyze your business line of credit alternatives

Your next strategy is to understand the major advantages and disadvantages of each type of popular lender.

Traditional lender

Obtaining a line of credit from traditional banks is highly sought after because of their terms and affordability. If you manage to get a business line of credit, if you manage to get a line of credit from a bank, you possibly should accept the offer. However, securing a line of credit from a bank is much easier said than done. To be eligible for a line of credit, traditional banks frequently require not less than two years of business history plus $250,000 in annual revenue.

 A good initial step to getting a business line of credit with a bank is to reach out to the bank you have an existing relationship with. Nonetheless, you should note that the majority of the banks have a time-consuming application process. If you have bad luck in getting approved by traditional lenders but still want reasonable terms and rates (such as Bank of America or Chase), you might want to consider a community bank or business line of a credit union.

Online lender business lines of credit

For those business owners who do not have the time or resources to spend filling out a traditional bank application, online lenders are better alternatives. To be eligible for a business line of credit, most online lenders will request you to complete the whole application online. Besides, most online lenders do not need sky-high credit scores or extensive financial records. 

After you submit your application, these lenders utilize a combination of both manual and automation underwriting to get you an offer. This indicates you can get a decision on your loan application within one to two business days. The interest rates are somewhat higher with online lenders since they get the money they lend to businesses from capital markets, which is more costly. However, their application and approval processes are generally much faster.

Business credit lines from credit unions

Credit unions are not-for-profit but are member-owned. This means that every member of a credit union has equal ownership and that any earnings made will improve their services and products, which indicates lower rates and typically better products for their clients. To join a credit union, you often must qualify for their field of membership, use your account frequently and pay a small fee. Fields of membership vary based on the credit union.

A significant downside of credit unions is the ease of use. Most credit unions have fewer branches and ATMs, which can make drawing money a hassle. Besides, credit unions do not have reliable mobile and online banking capabilities like banks and online lenders.

Step 3: Know the minimum requirements

Generally, traditional banks are the hardest to qualify for, followed by online lenders and credit unions.  You will want to determine what each of these lenders sets for their minimum requirements- annual revenue, personal credit score, and time in business- before you start collecting documents and filling out the application. Besides, if you can’t meet requirements, you do not want to waste your time applying for a credit line you are not likely to qualify for.

Step 4: Apply and make a decision

After you have collected all of the documents necessary based on your lender’s requirements, you are ready to complete your application and apply it. Suppose you are applying for a business line of credit from an alternative lender. In that case, you will possibly find that the online application is relatively simple, just requires limited documentation, and you can complete it in minutes. Nonetheless, if you are looking to obtain a business line of credit from the SBA or a bank, you will find that you need more documentation and that the procedure will be longer. In fact, most banks will require that you go in-person to apply for a line of credit.

With that being said, after you have submitted your application, you will want to ensure that you are prompt to answer any requests or questions from your lender- this will assist expedite the procedure and give you access to your funds faster. Typically, online lenders can fund business lines of credit applications more quickly, sometimes even within one day. As you might have expected, banks will be slower to fund, taking anywhere from a few days to a few weeks.

Bearing this in mind, once you have completed the application and answered any requests, the lender will give you an offer (that is if, you are approved). At this point, you will want to carefully assess the offer to understand how your business line of credit will work – and you should compare all of the offers you get to ascertain that you get the best terms and rates.

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