In the world of business, credit can help your business move closer to achieving its long-term earnings objectives. By having access to capital now, you can begin building your business, increasing revenue streams, and ultimately enhancing your bottom line. While credit is something that will obviously need to be handled with care, there is no denying that credit can be a very valuable thing.

Many people find themselves wondering how to get a line of credit for a small business. Contrary to larger businesses, who have more leverage and a more extensive track record, small businesses often find themselves struggling to find a lender. Fortunately, with just a little bit of research and some hard work, this problem is something you can eventually overcome.

In this article, we will discuss the most important things for you to know about how your small business can secure a line of credit. By taking the time to compare your options, you can secure the capital you need and move closer to achieving your long-term goals.


Understanding your Current Credit Needs

Before you begin the process of applying for a small business loan or small business line of credit, it is important to identify your current needs. Having credit simply for the sake of having credit will be unnecessarily costly over time. If you are going to begin borrowing, you should have a specific project or purpose in mind.

By only borrowing what you actually need, you’ll be able to minimize the amount you end up paying in interest and also improve your overall debt: equity ratio. A business line of credit can help make managing your debts much easier. Carefully working within your means will be essential for your business’ long-term financial success.


Applying for a Business Line of Credit

Applying for a business line of credit is not much different than applying for a personal line of credit, however, you will be applying as an entity rather than an individual. This means that, if you haven’t already, you will need to create a formal entity for business—even if you are the only person involved, you will still need to create a sole proprietorship.

Small business lenders will typically want to see that your business has had a history of paying its bills, generating income, and managing its credit responsibly. If you have a limited or poor business credit history, then you will likely be expected to pay a higher interest rate.

It is important to note that business lines of credit and business loans are two different forms of financing. With a business loan, you will be given a specific amount of money and asked to eventually pay it back. The lump sum of cash will remain within your possession, regardless of whether you put it in a bank account or immediately put it to use.

With a business line of credit, on the other hand, you will only be charged interest on the amount that you actually borrow. As is the case with a credit card, if you do not “max out” your available credit line, you can minimize the amount of interest you will need to pay. This incentivizes business owners to spend frugally and pay quickly pay down their debts.


Business Line of Credit Qualifications

The qualifications for a business line of credit will vary, depending on which lender you end up choosing. Some lenders are very strict and will only lend to businesses with an established credit history and a clear ability to pay their debts back in a timely manner. Other lenders will be much more flexible and will lend to almost any business. Be careful; in exchange for more generous lending terms, these businesses will typically demand a higher interest rate.

Shopping around and looking for the best business lines of credit will inevitably be worth your time. Comparing secured (reliant on collateral) and unsecured (not reliant on collateral) will also be worth your time. However, in order to maximize the probability of approval and minimize the impact on your business credit score, don’t apply to any lenders unless you plan on following through with the credit plan. Additionally, you can narrow down your options by looking for lenders that typically lend to businesses similar to your own.

Qualifying for a business line of credit may be easier than you initially assume. If your business has been operating for at least six months, produces at least $20,000 worth of monthly revenue, and you have a personal credit score over 620, you will be able to receive a line of credit from some of today’s top lenders. Considering that this is the ideal financing option for many businesses, it is certainly an option worth considering. Most lenders will allow you to apply online and get approved within one business day.


Small Business Administration (SBA) Loans

If your business cannot qualify for a small business line of credit, then applying for a loan from the small business administration may be your best option. The Small Business Administration (SBA) is a federal organization that partners with various different lenders to give loans to new businesses that are otherwise considered unlendable.

An SBA loan should not be considered your default borrowing option, rather, it should be saved as a backup plan in case you weren’t able to get any sort of financing elsewhere. Due to the unique relationship, the SBA has with both the federal government and private lenders, applying for these special loans is often more difficult than it initially appears.


Other Business Financing Options

As suggested earlier, one alternative to securing a business line of credit is to apply for a business loan instead. With a business loan, you will be responsible for paying interest on all debt outstanding, meaning you will want to pay down whatever you haven’t spent as quickly as you possibly can. Whether these loans are actually cheaper than a line of credit will depend on the amount you borrow and the specific loans you qualify for.

Another option—though many business owners prefer not to go this route—is to sell an ownership share of your business to an angel investor. In exchange for securing capital today, you can sell the rights to future profits or partial ownership of your business.


Deciding which Choice is Right for You

As you can see, there are many different ways your business can secure the financing it needs to achieve its long-term goals. Whether you choose to pursue a business line of credit—or any other type of financing, for that matter—will depend on a wide range of factors that are specific to your business.

All things considered, secured lines of business credit are a relatively low risk method for increasing your access to capital. If you are able to quickly pay down all that you’ve borrowed, you can advance your financial objectives at a very low cost. However, just because the financing options are available, that doesn’t mean you should view them recklessly. It will still be very important to exercise discipline and manage your finances with care.

Checking for pre-approval will not affect your credit score.

Andrew Paniello | Andrew attended the University of Colorado and earned degrees in Finance and Political Science (Philosophy minor). He is currently a freelance writer with a primary emphasis on business topics. In his free time, Andrew enjoys playing piano, painting, hiking, and playing basketball.