Business line of credit loans are by far the most flexible mode of borrowing for small business owners looking to maximize short-term success and productivity.
The “revolving” credit gives you support as and when you need it, helping to smooth out rough seasonal slow-downs and make the most of busy periods.
What’s even better about business lines of credit is that as long as you and your business fit the bill, they can be fairly easy to get approval for.
However, they can also be quite elusive for a number of reasons. Let’s take a look at some of the primary variables involved in LOC approval.
Secured vs Unsecured Business Lines of Credit
Whether a business LOC is secured or not is the biggest factor in how difficult an agreement is to get approved.
A secured line of credit means that you’ve put some sort of personal or business assets down as collateral to secure the loan. In some cases, as with inventory lines of credit, the items purchased with the loan can stand as collateral.
Loans with sufficient collateral are known as “secured” because the assets provide the lender with repayment security.
If the borrower fails to make payments for whatever reason, the lender has legal recourse to seize what they need to recoup their investment.
With this security blanket in place, a lender will be less hesitant when deciding whether to approve a business line of credit loan or not.
They stand to make a profit with the interest payments and their initial investment is essentially insured — it’s all good.
Putting your personal and business property assets on the table also communicates to the lender that you are confident and serious about the lending process.
Your confidence inspires confidence, and the lender is likely to be more lenient in terms of interest rates.
If you’re looking for the easiest way to acquire a business LOC, taking the secure route offers the biggest chance of being approved; however, as you need to pledge assets, the application process is arguably not as simple as that of unsecured LOCs.
An unsecured line of credit is the exact opposite of the secured LOC format. You don’t have to pledge assets as collateral, so in some respects, it’s an easier application process.
Unfortunately, though, your chances of getting approved drop, as the lender has no significant security net should something go wrong during the repayment term.
It’s also important to note that as you’re not placing any assets down against the loan, the eligibility requirements may be far more strict than those of the secured LOC variant. This is because the lender is seeking out security in alternative ways.
Things like a good credit score and evidence of business success go a long way, but make the loan more difficult to acquire.
Also, remember when I mentioned that the security of collateral tends to bring the interest rates down on a secured business LOC?
Well, in this case, you’ve guessed it...those interest rates are going to soar, as the lender needs to sweeten the deal in order to make the risk worth it.
Furthermore, with the risk being that much higher than a secured LOC agreement, the lender of an unsecured business LOC agreement is almost never going to offer you quite as much money.
I’d recommend sticking with a secured loan if possible as you’ll be paying less interest, and they’re ultimately easier to get approved.
Newer Businesses vs Established Organizations
The next most significant factor in business line of credit approval is the age of your business.
If you’re just starting out, and you don’t have all that much evidence of prior success, you’re going to find it way harder to find a willing lender than an established business.
Why is this? Well, it all comes back down to risk. As a nascent business venture, investment is more of a risk as there are so many unknowns surrounding the future of your outfit.
Are you going to be successful? Is your business model sound? Will you be able to make repayments on time?
These are all things running around a line of credit lender’s head when considering your application.
Borrowers never can fully answer these questions, but they can make use of historical evidence of fiscal responsibility and successful business practices in order to quell a lender’s doubts.
A two-year business record seems to be the standard for applying for most business loans, and although LOC agreements aren’t quite as strict on this front, you’ll still benefit from a lengthy business history.
You’d be hard-pressed to source a lender that doesn’t require you to have been in business for at least six months before they’ll consider your application.
It’s not just a time issue, though. In fact, time really has very little to do with it. Money is the actual crux of the matter.
As your business is still in its infancy, it hasn’t had time to really spread its wings and build up revenue.
On paper, this appears to a lender as if you won’t be able to make the repayments, making that business LOC way more difficult to snag.
Most lenders will stipulate that you must have at least $25,000 in annual revenue to apply for a business line of credit loan.
That’s not a lot compared to other loan formats, which is one of the things that make business LOCs fantastic, but if you’ve only been in business for a couple of months, you cannot state an annual revenue.
Sure, you could take what you’ve made so far and multiply it by however many days, weeks, or months, but the longer the period of time you’re estimating profit for, the less accurate your calculation is going to be, and the lender knows.
In light of this, it’s a good idea to try and tough it out on your own for as long as possible before trying to secure a business LOC or any sort of business loan for that matter.
You might try to get by using a typical business credit card. They’re never the best deal in the world, but they serve a purpose.
Then, with a proven track record of excellence, you can bring that revolving line of credit to your business.
Credit Score Calamity
Your credit score also plays a big part in how difficult it is to get a business line of credit loan.
Now, before you start panicking, most business line of credit lenders don’t have such strict credit score requirements, but a good credit score will definitely strengthen your case.
The magic number here is 500, which isn’t that high considering most standard term loans require something to the tune 650.
However, if you’re just starting your business career, you may not have such a great credit score just yet.
A Criminal History
If you’ve ever applied for a general term loan before, you’ll know that a lender doesn’t just want to know about your financial history.
They also want to work up an understanding of you as a person. The same is true of LOC lenders.
They’re going to perform at least some sort of background character check in order to assess your suitability for approval.
Everybody’s got some skeletons in the closet somewhere, so they’re not looking for a saintly past, but a criminal record can significantly damage your chances of securing an LOC loan.
On the other hand, if you’re got a squeaky clean record with no run-ins with the law, your application just got a whole lot more enticing.
This paints you as a trustworthy and law-abiding citizen, taking some risk out of the equation for the lender.
When a lender digs into your past, they’re not only looking for red flags like criminal records and financial delinquency, they’re hoping to find positive things too.
If you’ve got a history of professionalism under your belt, it gives more incentive to approve the LOC deal.
This can really be a saving grace for those with young businesses. If you can prove that you have a history of success in similar industries and roles, it offers the lender far more security.
It’s a peace of mind thing. They’ve seen that you’re a highly capable individual with plenty of experience, increasing the likelihood of your newest venture’s success.