Preparing Business Line of Credit Application: 5 Tips to apply for a Business Line of Credit

Business lines of credit are a popular commercial funding method. About 40% of small businesses in the U.S. apply for new credit each year. But not all of them get the funding they ask for.

Because of a lack of knowledge, mistakes in the application, or simply a failure to meet eligibility criteria, some applicants won’t qualify for a business line of credit.

That’s a problem. If your application is rejected, your business might struggle with cash flow issues. 

You can use credit lines to cover everything from inventory purchases to operational expenses. When you have ample credit, you can pay for business costs when your cash flow is short because of unpaid client invoices or a slow sales period. 

But to avoid rejection and ensure you get the proper funding, you need to know how to prepare your application. Business line of credit applications are relatively straightforward, but there are a few things you should know before getting started.

To help you on your journey, read this detailed overview of how to apply for a small business line of credit and what factors might stop you from getting approved.

Primarily, it serves as a continuous source of funding suitable for:

• Operational costs
• Inventory management
• Managing cash flow fluctuations
• Seizing time-sensitive opportunities
• Addressing business-specific needs

To illustrate, imagine having a business line of credit worth $100,000 at a 10% annual interest rate. If you deployed $70,000 as a cash flow stimulus, it would leave you with a remainder of $30,000. Contrary to common assumptions, you are not obligated to repay the entire $100,000 limit, complete with a 10% interest rate. The lender merely requires you to refund the $70,000 you credited, with a 10% interest on that balance. Hence, retaining a low balance is an effective strategy to keep interest charges and repayments manageable.

If you're a creditworthy borrower ready to explore this type of financing, and think it might suit your requirements, click here to apply for a business line of credit with your preferred lending institution.

Business Term Loan vs. a Business Line of Credit: What’s the Difference?

Small business loans or business term loans are very different from business lines of credit. When small business owners secure startup loans, often facilitated by business plan lenders, they receive a lump sum from either traditional banks or lending institutions that they immediately need to start repaying back with interest, taking into account their lending history and business credit score.

For example, if you get a $100,000 loan at 10% interest, you will start making fixed repayments on that amount right away. Moreover, as you repay the debt, you can’t tap into the loan for additional funds, nor can you lower the payment if you prepay a portion of the remaining balance during repayment.

A business line of credit gives you an accessible limit to utilize when needed, offering more flexibility. Let's say with a $100,000 credit limit, established on compatible credit repayment terms, you are committed to pay back only what you withdraw, not the full limit, and parallel to how financing operates with business credit cards. Thus, you might end up with a lower monthly payment on business lines of credit while continuously regaining your balance as long as you stay within your limit.

One essential distinction to annotate is that lines of credit are a more fitting solution for prompt cash flow relief. You can apply the credit to finance purchases and pay back what you spend promptly, thus averting high interest accumulation.

When Not to Apply for a Business Line of Credit

• Due to their typically higher interest rate compared to a term loan, or annualized payment structures, there are instances when exploring other funding or lending options like a term loan become more sensible.
• If your business needs major expansion, like hiring more personnel or investing in expensive machinery or technology, you will likely require hefty upfront lending amounts and require more time to repay. Here, the business line of credit might not be your best bet because credit lines offer less money due to there shorter terms and annualized payment structures.

In such scenarios, a traditional business loan turns into a suitable alternate. Banks and other lending institutions offer such term loans. You apply for the loan amount you need, repay it over a extended period of time, and once it's paid off, your obligation ends. Unlike the continual revolving nature of lines of credit, with a business loan, there's no reoccurring credit extension and thus no residual debt. When evaluating these financing types, always consider your business history and the preferences of different lenders.

5 tips to know before you apply for a Business Line of Credit

Tip#1: Establish or Repair Credit

Your personal credit and business credit will pay a significant role in whether you get approved for a business line of credit. Effectively, lenders, like American Express, perform checks using credit bureaus such as Equifax, Experian, and base decisions on your FICO credit score, which must be at least 660 at the time of application. It's, therefore, important to not only build, but consistently manage both personal and various business lines of credit such as credit cards and installment loans for credit-worthiness. If you possess a tainted credit history, remedying it is vital.

Remember to double-check all relevant details including;

• Contact information
• Creditors with open lines and there balances such as mortgages, car loans, installment loans, credit cards
• Reporting histories of all credit lines

Make sure you cure any errors if possible before applying for a business line of credit to increase your chances for approval and also receive best rates and terms.

Tip#2: Prepare Documents

A business line of credit will require documentation for pre-qualification and approval

The following are common documents need for review;

• Business bank statements
• Business tax return(s)
• Profit & loss (in some cases)
• Balance sheet
• Accounts receivable/accounts payable aging reports (in some cases)

It's crucial to have your bookkeeper or accountant maintain comprehensive data, ensuring excellent records of all business activities in case explanations are required. Furthermore, don't forget to create a reliable backup plan for your documents and to double-check all the numbers, contact information, and other relevant details before submitting. Emphasize proper accounting practices to keep your assets, revenue, debts, and expenses closely monitored so your prepared when applying for a business line of credit or any other business funding option for that matter. .

Tip#3: Research Lenders

It is important to compare lenders, as not all lenders are created equal. This involves researching banks and other lending institutions and considering the following;

• Reputation and reviews- Do a search to check the reviews and history of the business lender for customer experiences
• Knowledge and Experience- Determine the experience, lending history and knowledge related to business line of credit
• Diverse lending options - Determine if they offer the best products and terms, keeping the specific needs of your company in mind.

Tip#4: Research How a Business Line of Credit Works

Take the time to understand how a business line of credit works and all of its features.

These include;

• Credit repayment terms and features
• Lending credit limits amounts
• Any fees related to operating the credit line like draw fees or non usage fees
• Qualifications and document requirements

By doing so, you can properly compare the products from various lenders in terms of rates, features, terms and conditions, and how your business history with lenders might affect your borrowing potential. The more knowledgeable you are, the better you can select an option that suits your needs.

Tip#5: Shop and Compare Business Line of Credit Offers

Small business owners should NOT rely on one lenders approval and terms. Instead, they should shop around among various lending institutions, comparing business credit score lenders, credit repayment terms, and the business plan lenders desire to see. For example, a lending institution can offer a business line of credit with amortization terms that range from 6 months up to 36 months. This is a broad range and indicates why one should compare various start-up loan offers. Additionally, a credit line can be set up to pay interest differently and evaluating these options is critical due to your lending history and its potential impact on your business.

How to Apply for a Business Line of Credit

If you’re ready to apply for a business line of credit and submit an application, you should follow these steps to ensure you have the right documents and application information.

Step #1: Choose a Business Line of Credit Provider

Various financial institutions offer business lines. Among these, prominent banks like Bank of America are well know for offering business lines. Depending on which institution you go to and your business credit score, lenders can offer different conditions and credit repayment terms. You can apply for lines of credit from traditional banks, credit unions, or alternative online lenders. Remember that these lenders may require a detailed business plan to assess your repayment capabilities.

a. Banks and Credit Unions

Banks and credit unions are traditional business funding providers. They usually offer both a secured line of business credit, which has to be backed by collateral, and an unsecured business line of credit that does not require any collateral.

But because these institutions are more traditional, bank business credit lines tend to have strict eligibility requirements, making it harder for some small businesses to qualify. However, if your application is accepted, you’ll probably pay a lower interest rate.

In terms of collateral, these institutions will offer lower credit limits for unsecured business lines, so you will most likely have to provide collateral if you want a large limit. 

b. Online Lenders

If you want flexibility, convenience, and more relaxed criteria, online lenders are a better option. They have laxer eligibility requirements and offer flexible financing, which makes them ideal for startups that barely meet the minimum credit score requirements or are still looking to build business credit.

These institutions also process applications quickly, and you may get your line of credit within a few days after applying.

But, online lenders typically charge higher interest rates because they are taking on more risk by offering more flexible lending terms.  

Step #2: Fill Out the Application

Once you decide which financial institution to use for your application, it's time to start the process. Banks, credit unions, and even online lenders, all of which require substantial paperwork and documentation, require a completed application form to kickstart the procedure. These forms are often accessible online, or acquired by doing the legwork of visiting the bank or credit union in person, or interacting with their representatives via phone or email.

Application forms require you to provide basic, yet crucial, information about your small business. Accurate documentation is key, so you'll need detailed data such as;

• Business name
• Business address
• Contact information
• Business description-The services or products you offer, the industry you operate in, the number of employees
• Business Tax ID
• Personal information of the owners, name, address, date of birth & Social Security number (SSN)
• Annual revenue of the business
• The reason you need a credit line and the estimated amount/credit limit you need in your business credit line.

When filling out the application, ensure you have a backup of all entered information, take meticulous care to avoid errors, and provide the correct information. Once you've completed the application, don’t rush. Understand the lender's documentation requirements and patiently wait for a representative to contact you, allowing the process time to unfold over a few days.

Step #3: Submit Supporting Documents

The next step is the most critical part of the application process for lines of credit. When a representative contacts you to discuss your application, they will delve into both your personal and business documentation requirements. They will send you an email or letter specifying what documents they need from you on behalf of your business, which can range from accounting papers to your bank statements. Always remember to double-check all data, contacts and relevant details before submitting to any lender application including banks and alternative online lenders.

a. Personal Credit Score

Even though you're applying for business funding, the financial institution needs to make sure you, as the small business owner, are in good financial shape. So you’ll need to give the lender permission to check your credit report. 

If your business cannot meet its financial obligations and pay back the line of credit, then you might be responsible for covering it with personal assets.

To prove your financial well-being, every institution will have a minimum credit score you need to meet. This depends on their requirements, but most lenders will consider a score of 660 or higher to be good enough.

That doesn't mean you won't get the business line of credit if you don’t meet the minimum credit score. It just means that it might be more difficult, or you may have a higher interest rate.

b. Business Credit Score

Similar to your personal credit report, the lender will also need to look at your business credit report. This report will show your business's performance when dealing with other financial obligations, such as other loans, business credit cards, and merchant cash advances.

c. Business Financials

The lender will also review your business financial statements. These statements provide a detailed picture of your business's financial health. 

With most applications, you will have to submit these financial statements:

• Balance sheet
• Income statement
• Cash flow statement

The bank, credit union, or online lender will look at your revenue and profits and calculate various ratios — debt to equity ratio, current ratio, fixed-charge coverage ratio — to determine if the business is likely to meet all its obligations.

d. Time in Business

Young businesses and startups have a very high rate of failure, especially in the first two years of operations. That's why they are considered riskier. The reality is that most funding institutions will be wary of providing financing to newer businesses.

For a business line of credit, you might need to submit documents that prove you have been in business for more than two years. This includes documents such as:

• Business tax returns
• Business license
• Articles of incorporation
• Building lease
• Business plan

If you have been in business for less than two years, don't worry. You can still get a line of credit, but with stricter rules. For example, most institutions will require collateral and refuse to grant you unsecured lines. You will also be charged higher interest rates.

e. Availability of Collateral

Unsecured business lines do not require collateral. But you have to be in a strong financial position to get an unsecured loan. If you are a new startup, have a lower credit score, or do not meet eligibility requirements, the bank or online lender might offer you a secured business line of credit with collateral instead. 

Collateral is a business or personal asset that has roughly the same value as the amount you are asking for in a line of credit. For example, collateral can be a piece of real estate, a car, or other high-value assets.

If you or the business cannot afford to pay back the credit line, the lender has the right to seize your collateral.

If you are planning to offer collateral, you need to submit documents such as:

• Valuation of the collateral
• Proof of ownership by you or the business

Step #4: Wait for Processing

After submitting your documents, the lender will process your application. They will assess your business's qualifications by considering all the information and documents you've provided to evaluate if you meet the necessary criteria for the business line of credit. Their review process maintains high standards of accuracy and integrity. During this time, your main responsibilities are to answer any questions the lender poses about your application and supply any additional documents if necessary. Be sure to double-check all the details you've submitted for maximum credibility. This process is crucial to your business line of credit approval or any other financial product for that matter.

Step #5: Get a Response from the Lender

After evaluation, the lender will provide an answer for your application through a phone call, email, or notification on the application platform. The process of evaluation, including the placement of your application among the lender's pipeline, draws on their expertise and integrity in assessing your business eligibility for credit. Once approved for a line of credit — congratulations!

At this point, it's vital to read through the line of credit offer/agreement with utmost care, checking all the details of the offer.

• Pay attention to the rates, terms, fees & conditions- Engage with the lender to breakdown all terms in the offer
• Ask for a copy of the agreement related to offer for review and consideration

If your application gets rejected, actively seek feedback to understand why and explore possible means of salvaging it. This insight helps in gaining better understanding of how to meet the lender's qualifications for future applications.

Step #6: Use Your Business Line of Credit

If you get approval on your business line of credit, you can start using it immediately. This involves creating transactions and making withdrawals to manage cash flow, purchase supplies, and cover other costs from lending options like a merchant cash advance or invoice factoring. Keep in mind, withdrawal fees might apply each time you draw on the credit line. Once you start withdrawing funds, remember that cash flow projections become crucial and you'll have to begin making monthly payments, a key consideration for business history lenders. Look into your lending institution carefully, for your business loan's terms could possibly include prepayment penalty fees charged if you pay off your balance early.

Why Your Application for a Business Line of Credit Could Be Rejected

If you don’t get approved, it could be because of one of the following reasons:

1. High Industry Risk

One reason your application for a line of credit could be rejected is industry risk. For example, hospitality and other seasonal industries are viewed as higher risk than grocery stores and manufacturers, which tend to have stable revenues.

If the reason for rejection is this risk, there are a few things you can do. One of the best ways to counteract this rejection is by offering collateral, if available. Another way is to demonstrate that you, as the business owner, have a strong financial situation and can pay back the credit line if the business is unable to.

2. Not Enough Collateral

If you do not have enough collateral to put toward your line of credit, more traditional institutions, such as banks or credit unions, may reject your application.

In this case, you can agree to a higher interest rate in exchange for approval. Or, you can demonstrate the business's or your strong financial situation through detailed financial statements — the goal is to assure the lender that you won't default on your line of credit.

3. Low Credit Score

A low credit score can be damaging, but if you get a rejection because of it, there are still ways to salvage the application. You can do things such as:

• Contact an alternative lender with lower credit standards
• Accept a higher interest rate
• Provide collateral
• Demonstrate the financial strength of your business
• Provide proof of your own strong financial situation

4. Not Enough Time in Business

Finally, if you are a new startup with under two years of business operations, you have a high likelihood of being rejected. To counteract this, you can:

• Contact an alternat
• Demonstrate your strong business performance with financial statements
• Provide proof that you as the owner can cover the line of credit in case the business is unable to
• Offer collateral

What Fees Can You Expect After Getting Your Business Line of Credit?

Some of the fees you can expect to be charged after getting a line of business credit are:

• Origination fee: The necessary cost for the institution to process your application
• Account maintenance fee: A monthly or annual fee to cover the cost of managing your account and keeping an active business line of credit
• Draw fee: A fee charged every time you draw funds from the credit line
• Inactivity fee: A fee to cover the cost of you not drawing funds from your line of credit for a specific period of time

You will see these fees in your line of credit agreement. Indeed, these fees lenders charge are essential components of the line's annual percentage rate (APR). Furthermore, your business's annual gross revenue as well as available lending amounts can influence some fees. When evaluating lending options, investigate different lending institutions to see how these fees might vary. Crucially, understanding these fees is crucial to developing practical credit repayment terms. Look for them and ensure you're comfortable paying them prior to agreeing to the loan.

Conclusion

A business line of credit is useful for improving the day-to-day operations of your business. As a startup company, you can draw funds from it like a business credit card, only repaying the borrowed amount. A startup loan, such as a business line of credit, can certainly be a practical funding solution, but it's vital to note that there are plenty of other options available if you're looking to take your business to the next stage of growth.

To better understand your choices, specifically for small business lending, a business funding marketplace is an ideal starting point. AdvancePoint Capital provides small businesses with detailed comparisons of their funding options, including different types of business plan lenders. It allows you to apply in just a few minutes, and you could have the long-term or short-term funding you need in just a few days.