Revolving Line of Credit Requirements: What You Need to Know [2023]

Do you need a ready source of working capital for your business? A revolving line of credit can be the buffer you need when cash flow isn’t sufficient to cover expenses. It’s the most reliable backup, whether you’re facing an emergency or seasonal slowdown, as you can draw the same funds again after you’ve repaid them.

You only pay interest on the amount you draw, too, which saves borrowers from paying unnecessary interest. Find out what the business line of credit requirements are—and how this flexible financing option can help you.

When a Revolving Business Line of Credit Can Help

Lack of cash and capital are concerns for about one-third of small businesses. But with a line of credit, you’ll always have enough money to:

• Cover operational expenses
• Handle fixed costs, such as rent and utilities
• Process payroll
• Pay business taxes
• Hire staff as needed
• Purchase inventory or supplies to fulfil large orders
• Take advantage of bulk purchase or early payment discounts

Unlike funds from small business loans, which disappear after you use them, money in a revolving credit line is always available. You can draw the same funds again after you’ve repaid them, which provides an always-available capital source to help you manage costs and invest in your business.

You only need to apply once to get ongoing access. And because you can withdraw money as needed, your business remains secure even when unexpected expenses arise or customers don’t pay on time.

How Does a Revolving Business Line of Credit Work?

A revolving line of credit is structured to provide financing up to a given amount – your credit limit. Instead of getting the full amount at once, you withdraw money when you need it and make payments only on what you draw.

Having a business line of credit keeps you prepared for growth opportunities. You never know when a lucrative deal or new opportunities, like expansion or a supplier discount, might come along. When it does, you can draw on your line of credit to make the investment without compromising cash flow.

Revolving lines of credit technically have no formal repayment schedule, as borrowers will make payments toward their outstanding amount much like they would a credit card. If either party decides to end the relationship, they must do so through a formal contract agreement. Until then, the borrower can continue drawing and repaying the amount they borrow on the schedule outlined by their lender in their contract.

Draw When You Want, and Only Pay Interest on What You Take

You can draw as many times as you want up to the credit limit, which is a much safer option than trying to use multiple loans of various sizes to cover your expenses. Paying back what you draw replenishes your available credit, giving you renewed access to funds.

This is different from a business loan, where you have a fixed payment schedule starting when you get funded and must continue making payments until the end of the loan term, regardless of how much money remains. Revolving lines of credit provide consistent access to capital, allowing entrepreneurs to draw and repay as needed.

Business Line of Credit Core Requirements: Everything You Need to Qualify

Business line of credit requirements will vary depending on the lender. However, you can count on three main requirements to almost always affect your eligibility. These include your annual revenue, credit score, and how long you’ve been in business.

In the new modern financing world, online lenders are more concerned with where your business is going, rather than your history. Because lenders are interested in how funding could open new opportunities, you can usually qualify based on revenue—even if your credit score is below the mark.

Annual Revenue

Having strong revenue and consistent cash flow signals to lenders that you’ll be able to repay your credit line. Lenders will want to review your business bank statements or even link your bank account. They will be looking for proof of steady or growing income over time.

Different lenders will have different annual revenue requirements, although $120,000 is often the minimum. Nonetheless, it’s usually possible to find other options with a lower annual gross sales number.

Credit Score

You can expect lenders to verify both your personal credit score as well as your business credit score. Oftentimes, a business line of credit requires a personal guarantee. Lenders will feel you’re more likely to pay back what you owe if your personal finances are on the line.

Lenders will also evaluate your business credit score and credit history. If your business is still in its early stages and doesn’t have any credit history, your personal credit score may carry more weight.

Having good credit, or a FICO score above 700, will boost your chances of qualifying for a line of credit. While you can still get a small business line with bad credit, you may end up with fewer options or a high interest rate.

Time in Business

Lenders see small businesses as risky. However, if you can show that your business has been profitable for some time, you’ll be more likely to qualify for a line of credit.

Generally, most traditional lenders prefer you’ve been in business for at least two years. However, some businesses have been able to get funding after 1+ years when working with online lenders.

What Are the Documents Required for a Revolving Line of Credit?

Along with your annual revenue, credit score, and business history, there are other business line of credit requirements you must meet to reach an approval. Depending on whether you apply through a bank or an online lender, along with your financials, these factors may or may not come into play.

In some cases, you may be asked to put up collateral. This is especially true if you have a poor credit score, weak revenue, or if you’re an early-stage company. However, not all lenders will insist on collateral, and you may be able to qualify for an unsecured line of credit options.

Many online lenders don’t require all of the documents below, but other online and traditional lenders may need to see them.

• Business financials, including balance sheets, bank statements, tax returns, profit and loss statements, debt to equity ratio, expense ratio, debt schedule, and cash flow history and projections.
• Business plan
• Number of open credit accounts or lines
• Liquidity of available assets
• Industry risk level and growth potential
• Legal documents, including business licenses and registrations
• Financial history, including bankruptcy or liens
• Availability of collateral (for a secured line of credit)

Other Revolving Line of Credit Requirements

Revolving lines of credit carry more restrictive eligibility requirements than traditional lines of credit, which may stand as a hurdle for some borrowers. However, there are two options for revolving lines of credit – secured and unsecured.

A secured line of credit requires the borrower to offer an asset as collateral. While it’s a risk to the borrower, it mitigates the lender’s risk of financial loss and, in turn, allows them to offer more favorable terms and looser eligibility criteria. Borrowers who can’t meet the qualifications of secured financing should consider an unsecured option to help them accomplish their goals as they gain more experience and build stronger credit.

Outside of a possible collateral requirement, businesses should be aware that some lenders charge draw fees or require minimum withdrawal amounts from credit lines. Other lenders charge “inactivity fees” if you don’t draw on the line at least once in a given time frame. It’s essential to ask your lender about these contingencies before finalizing your contract. You don’t want to find out you owe more money after you’ve already racked up a bill, do you?