Credit limit: How credit limits are determined and how to increase yours

Using debt financing to generate working capital or fund an expansion can be a key to success for your small business. As a startup, credit eligibility is usually dependent on your personal credit score and credit history. But if you’re a more established business, you may have a business credit rating from a credit bureau like Dunn & Bradstreet or Experian Business.

In this article, we’ll review how credit limits are determined for credit cards and small business loans. We’ll also talk about how debt affects your company’s balance sheet and how to increase business credit limits. In the final section, we’ll go over Ramp’s commerce sales-based underwriting program and how it can help your business.

What is a credit limit?

A credit limit is the amount of money that an applicant is approved to borrow from a lender. That funding could be structured as a business loan, business credit card, or business line of credit. The credit limits on each of these are set in the lending agreement, but they may be reviewed later if the repayment terms and conditions are met.

Lenders may offer higher credit limits if you can offer collateral for a secured loan. Business owners can also do an unsecured vs. secured credit card comparison if a traditional loan or line of credit isn't available. Collateralized financial products, a form of secured credit, allow you to control your own credit limit. This can be appealing in certain cases, like if you’re looking to access large loan amounts but have limited creditworthiness.

Being approved for a high credit limit isn’t always a good thing. In some cases, the borrower can take more than needed and bury the company in high-interest debt. It’s best to do some thorough financial planning and analysis before asking for a specific amount of money. Better yet, apply for a line of credit instead of a loan.

 Sometimes, though, being approved for a higher credit limit can be risky. You might be tempted to take more than your company really needs, which can land you with high-interest debt. It’s best to do some thorough financial planning and analysis so you know exactly how much you’ll need. Better yet, apply for a line of credit instead of a loan—that way you can only draw money as needed.

What is a credit line? 

A credit line, aka line of credit (LOC), is a type of loan that allows you to borrow up to a pre-set limit. You can use as little or as much of the funds as you like, and you only have to pay interest on the money you borrow, eliminating the worry of over-borrowing.

With an open line of credit, you can go back and borrow again after you’ve paid off your balance. Many businesses use a LOC to better manage inventory purchases or to fund growth. The flexibility a line of credit offers makes it ideal for scenarios when invoice processing is required before new revenue starts rolling in.    

How are credit limits determined?

Credit limits are determined by your credit card issuer or loan provider during the approval process. Your limit may be lower if it’s solely based on a personal credit score, while higher revenue and a business credit score will give you access to a higher limit. 

Here are four factors that will determine your credit limit:

Payment history

Paying your bills on time and in full is the most important factor for strengthening your credit score and raising the amount of credit you’re eligible for. On the contrary, providers may decrease your credit limit if you fall behind on payments, or if you regularly exceed your credit limit.

Total debt

‍Lenders want to know how much you as a company or an individual already owe to other lenders before they approve you for more funding. Total debt refers to the combined amount of all outstanding debts and financial obligations that your business owes to creditors, including loans, credit lines, bonds, and other forms of borrowed money.

Debt-to-income ratio

While the amount of debt you owe is a determining factor, what’s more important is your debt-to-income ratio (DTI). That’s your monthly debt payments divided by your gross monthly income. If your business income is significantly higher than what you owe, you may be approved for a credit limit increase. Lenders like to see DTIs at 50% or lower.

Credit utilization rate

Your credit utilization rate, aka credit utilization ratio, refers to the size of your balance compared to your credit limit. To calculate it, divide your outstanding credit card balances by your total credit card limits. For example, if you have $2,000 in credit card debt and a total credit limit of $10,000, your credit utilization rate would be 20%. A lower credit utilization rate demonstrates responsible credit use and will boost your credit score, leading to higher limits.

How are my business credit score and credit limit related?

A business credit score is calculated using factors that paint a picture of your company’s credit history. These include payment history, late payments, total revenue, and debt-to-income ratio. When lenders see a high business credit score, they’ll consider giving you a higher credit limit on new loans. Credit card companies may also offer better credit card rewards for higher scores.

On the flip side, missed or late payments will have a negative effect on your credit score. You can avoid missing payments by investing in small business accounting software to keep track of cash inflows and outflows. Ramp connects to several accounting platforms, including QuickBooks, and we help you track business expenses, so you can stay organized. 

What is the difference between a credit limit and available credit?

Your credit limit is the maximum amount a lender allows you to borrow on a credit card or line of credit. It's like your spending cap. Available credit, on the other hand, is the amount you have left to borrow within that limit after deducting your outstanding balances. Think of it as the remaining balance on your credit card or credit line that you can still use without going over your limit. Tracking both your credit limit and available credit is crucial to managing your finances responsibly and avoiding over-borrowing.

The problem with traditional credit issuers

Small business owners and startups are often frustrated by the low credit limits offered by traditional lenders. Many fail to meet the minimum income requirements or haven’t been in business long enough to qualify for a loan. Banks will encourage them to get a charge card or credit card and reapply when they’re more established.   

 As a small business, you may be discouraged by the limited credit amounts offered by traditional lenders. Your business might fall short of the minimum income requirements, or you might not have over a year of business history to qualify for a loan.

Credit card companies also sometimes deny less established small businesses. That’s why sole proprietors and single owner LLCs often use their personal credit cards and keep expense reports. Unfortunately, this means taking on higher-interest debt and leaving your company liable to the IRS denying certain tax deductions.

How to raise your business’s credit limit

The first step to raising your credit limit is building a good business credit score. If you currently use your personal credit report to apply for loans, you should consider starting to build business credit by using a business or corporate credit card.

The next most important step is to establish creditworthiness by paying in full and on time. Creating a cashflow management program with spending controls and real-time expense tracking can help you manage your business payments and create a healthy financial culture—see how Ramp can help.

If you can’t get a traditional business credit card, try applying for a prepaid business credit card. Many of the companies that issue them report to business credit bureaus, so you can still use prepaid cards to build business credit, without worrying about interest or debt.

Ramp’s corporate cards offer another way to build business credit while controlling unnecessary spending. With our custom spending limits, you can make sure your team only spends what it needs and bills get paid on time. Think of it like a purchase card, with a set limit that can only be used with certain vendors.

What happens if I exceed my credit limit?

The best way to avoid exceeding your credit limit is to make doing so impossible. Avoid traditional credit cards that will even let you go over your limit, leading to hefty fees. Stick to loans and lines of credit for large business investments, and consider a corporate card with custom spending limits for everyday purchases.

Startup funding simplified: Introducing Ramp’s ecommerce sales-based underwriting

At Ramp, we’re committed to helping small businesses access the funds they need to accelerate their growth. As a startup, traditional lenders may not approve you for a loan because your revenue is too low, or your company hasn’t been in business long enough. But if you have ecommerce sales revenue coming in, then Ramp’s sales-based underwriting can help you out.

Ramp can offer a credit limit up to 30 times higher than our competitors. That’s because we use our connections to some of the biggest commerce platforms, web stores, and marketplaces in the industry such as Stripe, Shopify, and Amazon to underwrite credit limits for businesses using their commerce sales data. To qualify, all you need is one year of sales data. Learn more about how Ramp’s commerce sales-based underwriting works here.

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