A line of credit is a powerful tool for any business owner. Unlike a loan, which is received as a lump sum and begins accruing interest immediately, a business line of credit is available to you when you need it—and you only pay interest on the amount you actually use.
Having a line of credit at your disposal can help you manage cash flow, purchase inventory or pay for unexpected expenses. So you never end up in a jam, it may be a good idea to secure approval before you even have a specific need. You’ll be able to sleep better knowing you have funds to draw from if necessary.
How do you go about getting a large business line of credit? Here are the five steps we recommend:
- Determine how much funding you need. It may seem obvious, but the first thing you should do when you apply for a business line of credit is decide how much credit you need. Be aware since you’ll only pay interest on the amount you use, it can be a good idea to ask for a higher amount than you think you’ll actually need—as long as you keep your spending to what you can afford to pay back.
Business lines of credit up to $250,000 may be available, but the more you ask for, the more scrutiny you and your business are going to come under, i.e., it’s easier to get a line of credit of $25,000 than it is to get one of $100,000 or more. It may be a good strategy to ask for a lower amount initially and then ask for a credit line increase—which may require collateral to secure.
- Find out how to qualify. The three most vital factors that will determine your eligibility will be your credit history, business revenue and time in business. Most lenders require a personal credit score of at least 680, but some will accept scores as low as 580 or 600. Business revenue requirements typically range from $10,000 per month to $250,000 per year, with alternative lenders being less stringent than banks. Same for time in business; alternative lenders may require only six months while banks demand one or two years. As you might expect, having a higher score, more revenue and a longer time in business will give you a better chance of getting a lower interest rate and higher line of credit.
- Research and compare lending options. It’s important to compare various lenders’ maximum credit limits, repayment terms, minimum requirements and APR ranges once you know how much you want and your eligibility. If you have a lower credit score, shorter business history or lower business revenue—or your business is new—it may not be in the cards for you to get a business line of credit from a bank or credit union. Alternative lenders specialize in working with business owners who’ve heard “no” from those traditional institutions.
- Produce documentation. When you prepare a formal application for any lender—traditional or alternative—you’ll need plenty of documentation at the ready. This will usually include your personal and business tax returns, business license(s), articles of incorporation, personal and business bank statements, profit and loss statements, financial statements, business plan and building lease, if applicable. It’s best to gather these documents before you start filling out the application so you can get it done in one sitting.
- Submit your application. Once you’ve completed the application, submit it online or in person. Alternative lenders may make a decision in hours, while banks and credit unions will likely have a longer turnaround time. You may be asked to provide more information after your application is reviewed, including your Social Security number, business tax ID and loan purpose. Once your application is approved and you’ve signed the loan agreement, you’ll be able to draw from your business line of credit as necessary.
As a business owner, securing a line of credit can be part of a great strategy to build your business. Unlike traditional lenders like banks, whose application and approval process can be cumbersome and often end with a “no,” alternative lenders are in your corner and focused on helping you make your business dreams come true.
If you have any questions about how to apply for a business line of credit, give Clear Skies Capital a call at 800-230-9822. You may be pleasantly surprised at what you qualify for.