Business Line of Credit: What Banks Require (Checklist)

How a bank line of credit works

A revolving line of credit lets you draw funds, repay them, and draw again up to a set limit during the life of the line. You pay interest only on what you have drawn. Banks design lines to fund short-term working capital needs: carrying receivables until customers pay, buying inventory ahead of a busy season, or smoothing payroll timing. They are not meant to fund long-term assets or cover ongoing losses. Using a line for a permanent need (an acquisition, equipment, or a building) is a common reason banks decline renewals; that need belongs in a term loan.

What banks look for

Common bank line-of-credit requirements
Area	What banks typically want to see
Operating history	Two or more years of business tax returns
Profitability	Consistent profit and positive cash flow; losses need a clear explanation
Working capital	Current assets comfortably exceeding current liabilities
Leverage	Reasonable total liabilities relative to tangible net worth
Collateral	A general lien on business assets; receivables and inventory are the primary support
Guarantees	Personal guarantees from owners with 20% or more, in most cases
Deposit relationship	Many banks expect your operating accounts to move to them

The borrowing base

For larger lines, especially for distributors, manufacturers and contractors, banks use a borrowing base. Each month (or quarter), you submit a certificate showing eligible receivables and inventory, and the bank applies advance rates to calculate how much you may borrow.

Illustrative borrowing base structure (example only)
Asset	Common treatment
Accounts receivable under 90 days	Advance rates often in the 70%–85% range
Receivables over 90 days, from affiliates, or foreign	Usually excluded as ineligible
Raw materials and finished goods inventory	Lower advance rates, often capped at a dollar amount
Work-in-process inventory	Frequently excluded

These ranges are general illustrations, not offers; each bank sets its own eligibility and advance rates. Smaller lines are often “formula-free” and sized from overall financial strength instead.

How banks size a line

Banks generally size a line to your actual working capital cycle. A common starting point is a percentage of annual revenue, cross-checked against receivables and inventory levels and your historical peak borrowing needs. A distributor that carries 60 days of receivables will justify a bigger line than a cash business. Bring a simple explanation of your cash cycle: how long from paying suppliers to collecting from customers.

Covenants and the annual clean-up

Lines usually come with financial covenants such as a minimum debt service coverage ratio, a maximum debt-to-tangible-net-worth ratio, or minimum profitability. Some banks require an annual “clean-up” period, where the balance must be paid to zero for a set number of consecutive days, to prove the line is truly revolving. Ask about covenants before you sign; they are as important as the rate.

Documents to prepare

Three years of business tax returns and year-end financial statements
Current interim P&L and balance sheet
Accounts receivable and accounts payable agings
Inventory report, if inventory supports the line
Business debt schedule
Personal financial statements and tax returns for guarantors
Customer concentration detail if any customer exceeds a meaningful share of sales

The complete list is in our C&I document checklist.

Annual renewal

Most bank lines have a one-year maturity and are renewed after the bank reviews year-end tax returns or financial statements. Deliver those promptly; a late renewal package can leave a line in limbo. If performance weakened, tell your banker early with an explanation and a plan.

Why lines get declined

Recent losses without a credible explanation
Line usage that never revolves (always fully drawn)
Heavy customer concentration
Weak or declining working capital
Existing liens (for example, from merchant cash advances) that block the bank’s first position

Bank line vs. alternatives

Working capital options compared (general)
Option	Typical cost	Typical fit
Bank revolving line	Generally the lowest-cost working capital for qualified borrowers	Profitable, established businesses with receivables or inventory
SBA CAPLines	Bank pricing plus SBA fees	Seasonal or contract-driven needs that miss conventional criteria
Asset-based lender or factoring	Typically higher than a bank line	Fast-growing or less profitable companies with strong receivables
Merchant cash advance	Often far more expensive; daily or weekly remittances	Generally a last resort; can block future bank financing

Key takeaways

Banks approve lines for short-term working capital, not permanent needs.
Receivables and inventory, along with consistent profitability, are what support a line.
Larger lines often use a borrowing base with monthly reporting.
Read the covenants and renewal terms as closely as the rate.
Deliver annual financials promptly to keep the line renewing smoothly.

Questions to ask a bank before you sign

Is the line formula-based (borrowing base) or formula-free?
What financial covenants apply, and how often are they tested?
Is there an annual clean-up or unused-line fee?
Is there a deposit relationship requirement?
What happens at maturity if renewal is delayed?

How Credit Simplicity helps

We document your working capital cycle, prepare the financial package and present your request to multiple banks so you can compare line structures, covenants and pricing. See how it works or get started.

Frequently asked questions

What is the difference between a line of credit and a term loan?

A line of credit revolves: you draw, repay and redraw up to a limit for short-term needs. A term loan is a one-time lump sum repaid on a fixed schedule for long-term purposes.

Is a business line of credit secured?

Bank lines are usually secured by a general lien on business assets, especially receivables and inventory, plus personal guarantees from major owners.

How often does a bank line of credit renew?

Most bank lines have a one-year term and renew after the bank reviews updated financial statements.

What is a borrowing base certificate?

A periodic report of eligible receivables and inventory that determines how much you can borrow under an asset-based line.

Can I use a line of credit to buy equipment?

Banks generally discourage it. Long-lived assets are better financed with an equipment loan or term loan matched to the asset's life.

How big a line of credit can my business get?

Banks typically size a line to your working capital cycle, cross-checking against revenue, receivables and inventory, and your financial strength. There is no single formula across banks.

Will moving my deposits help?

Often. Many banks price and approve more favorably when they hold your operating accounts.

This guide is general information, not legal, tax or credit advice. Requirements and terms vary by lender and change over time. Credit Simplicity is an advisor, not a lender; financing is subject to each bank’s approval.

Business line of credit: what banks require