How to Establish a Business Line of Credit

If you’ve got a business bank account and established operations, it’s time to think about a business line of credit. In this blog post, we’ll guide you through the process of establishing a business line of credit.

The best part? You only pay interest on the amount you use, not the fully approved credit line, so you can use it to fit your business needs.

Let’s breakdown how to secure a business line of credit and why it’s beneficial.

What is a Business Line of Credit

Whether you’re a small business owner or have already achieved success, a business line of credit is a type of revolving credit designed to address intermediary funding needs.

Similar to business credit cards, your business is approved for a specific credit amount, and you can draw on that credit as needed.

The key advantage? You only pay interest on the amount you actively borrow.

Rates on a business line of credit are usually higher than on traditional business loans, and interest rates vary depending on your credit history, time in business, and annual revenue among other factors.

It’s necessary to have a business line of credit rather than a personal line of credit so you can separate business funds and personal funds.

If you’ve set up an LLC to protect your assets, a business line of credit is an additional protective step.

Secured vs. Unsecured Lines of Credit

One critical aspect to consider is whether the line of credit is secured or unsecured. Secured lines of credit involve putting up collateral (like a house or other property), reducing the risk for lenders and often resulting in lower interest rates.

On the other hand, unsecured lines of credit don’t require collateral but may come with higher interest rates or fees.

Why Get a Business Line of Credit?

Why should you consider getting a business line of credit? First off, a business line of credit offers flexibility to use funds when needed. If cash flow isn’t an issue, you’re not obligated to use the credit line.

This flexibility is particularly useful for business expansion or covering expenses while waiting for invoices to be paid.

Other advantages include only paying interest on what you’ve borrowed, the ability to build your business credit score, and potential access to lower interest rates.

How to Get a Business Line of Credit

There are five steps you need to go through to start a business line of credit:

1. Determine your needs

Business needs can vary widely with business lines of credit ranging from $2,000 to $250,000 or more.

Consider possible business funding needs, ranging from employee salaries to equipment purchases. Apply for more than you need, as you’re not obligated to use the full credit line.

2. Check your eligibility requirements

Different lenders have varying eligibility criteria, including credit score, business revenue, and time in business. Some lenders require a minimum credit score of 600 while others look for a higher credit.

Prepare necessary documentation such as business plans, bank statements for both the business and owners’ tax returns, and balance sheets.

3. Choose the right lender

Research and compare lenders to find the most favorable rates. Look for a lender with the lowest available interest rate for the business line of credit you need.

4. Prepare your business documentation

Prepare all necessary documents and financial statements, including:

• business bank statements

• personal bank statements

• business tax returns

• personal tax returns

• business balance sheet

• business income statements

• statements of cash flow

• business formation documents to verify number of years in business

• business leases if applicable

• any business registration and relevant license

Having these ready in advance will expedite the application process.

5. Apply for the line of credit

Submit your application online or in person. Approval times can take between 5 minutes up to a few days.

Common information you’ll need to provide includes the following; your name, the business’s name, your social security number, your EIN, the desired loan amount, the loan purpose, annual revenue, number of years in business, and any additional financial statements.

After the loan is approved, you’ll receive a loan agreement that outlines the terms including the total credit line, interest rate, and repayment. Carefully review all terms before signing the loan agreement and receiving a business line of credit.

What are the Costs and Fees?

There are a number of costs and fees associated with a business line of credit. Choose the most favorable terms and check which fees your line of credit requires.

Common fees include:

• origination fees

• annual or monthly fees

• draw fees

• payment processing fees

• wire transfer fees

• late payment fees

• prepayment fees

FAQs

Let’s address some common questions about obtaining credit for your business.

How much of a credit limit can I get for my business?

Business lines of credit typically range from $2,000 to $250,000 or more. Consult with lenders to determine the amount based on your credit score, years in business, and total revenue.

Can I use a business line of credit for personal expenses?

No, a business line of credit is specifically for funding business needs. Maintaining separate bank accounts for personal and business expenses is advisable.

Learn more about what counts as business expenses.

How long does it take to get approved for a business line of credit?

Approval times vary from 5 minutes to a few business days, depending on the lender and the information provided.

Can a startup get a business line of credit?

Some lenders offer business lines of credit to startups, but many may require at least 6 months of operations before considering an application.

Can I use my business line of credit to pay off existing debt?

Yes, you can use a business line of credit to pay off existing business debts, provided the interest rate is lower than that of the existing debt. However, it cannot be used for personal debt repayment.

Get Started With doola

At doola, we understand that building and growing a business require support. Our business formation and compliance services are designed to assist busy founders like you. From guaranteed formation services to help with EIN creation and opening a business bank account, doola is here to make your business journey smoother.

If you have any lingering questions or need more guidance, feel free to reach out.

Check out our FAQ page and the full list of our Business Solutions to see which one is right for you!