A business line of credit is one of the most useful financial tools available to small business owners. Unlike a term loan where you receive a lump sum and pay it back over time, a line of credit gives you access to funds as you need them. You only pay interest on what you use.
When a Line of Credit Makes Sense
Seasonal cash flow gaps where revenue dips predictably. Bridging the gap between invoicing and collection. Taking advantage of bulk purchase discounts. Covering unexpected expenses without disrupting operations.
A line of credit is not a solution for a fundamentally unprofitable business. If you need borrowed money to cover regular operating expenses every month, the problem is your business model, not your access to credit.
What Lenders Look At
Time in Business
Most traditional lenders want to see at least two years of operating history. Some online lenders will work with businesses as young as six months, but the terms will be less favorable.Revenue
Lenders want to see consistent revenue that demonstrates ability to repay. Most look for a minimum of $100,000 to $250,000 in annual revenue for traditional lines of credit.Credit Score
Both your personal and business credit scores matter. A personal score above 680 opens most doors. Below 620 and your options narrow significantly.Cash Flow
This is the big one. Lenders analyze your cash flow to determine whether your business generates enough to cover existing obligations plus the new line of credit. They look at your debt service coverage ratio, which is your net operating income divided by total debt payments.Financial Statements
Clean, accurate, and current financial statements signal a well-managed business. If your books are a mess, lenders see risk. If you walk in with organized statements, you start the conversation from a position of strength.How to Prepare
Clean up your books first
Get your financial statements current and accurate. Reconcile all accounts. Resolve any discrepancies. This should happen months before you apply, not the week of.Reduce existing debt
Pay down credit cards and other revolving debt. A lower debt-to-income ratio strengthens your application significantly.Prepare a business plan
Not a 50-page document. A concise summary of your business, your revenue trajectory, and specifically how you plan to use the line of credit. Lenders want to see that you have a plan, not that you are desperate.Gather documentation
Two years of tax returns. Year-to-date profit and loss statement. Balance sheet. Bank statements for the last 3-6 months. Business licenses and legal documents.Shop Around
Do not accept the first offer. Compare rates, terms, fees, and repayment requirements across multiple lenders. Your bank, credit unions, SBA lenders, and online lenders all offer different structures.