Securing a line of credit for your business can be a daunting task, and you may seem unsure of how to get the ball rolling. What is the line of credit? What are the requirements? Do I qualify? What do I qualify for? All these questions are valid and important when looking into a line of credit. Below are eight tips to secure a line of credit for your business.
If you take the risk of applying for a line of credit without knowing its requirements, chances of rejection are bigger than ever. You should make sure your business qualifies for a line of credit prior to applying. How do you do this? You’ll want to look at your (1) credit score and (2) revenue.
(1) Your business credit score allows lenders to know how creditworthy you are. Business credit scores range from 0 to 100. The higher the score, the better the terms you’ll be offered. The minimum credit score is 500. Your credit score shows how financially stable you are and how much of a risk you will be to the lenders. To boost your business credit score, you should pay your debt off by its payment deadline, decrease your “credit utilization ratio,” dispute charge errors, and monitor your business credit score regularly.
(2) Annual revenue is one of the most important aspects lenders investigate. Lenders are looking for trends, and preferably, sales growth trends. This is how you show them that you know how to run a successful business and that they can feel confident about investing in you. The minimum amount is $50,000.
Although lenders will focus on business qualifications, lenders will review your personal information. They will look at your professional experiences, personal credit, and personal assets. All these will help lenders verify that you are capable of running a business, repaying debt, and managing finances. They will usually run a background check to determine if there are any red flags prior to making a decision.
Loan Type Options
You’ll want to weigh all your line of credit options. Your business has its own needs, and one option may be a better fit than another, as each has its own pros and cons.
Traditional bank lines of credit are very popular among businesses due to the terms and affordability they offer. Because these are highly sought after, traditional bank lines of credit are harder to be approved for. To secure this line of credit, your business will need a work history of 2+ years and at least $250,000 in annual revenue. The application process is typically long and complicated compared to other options.
Online lender lines of credit offer a much quicker application process than the traditional bank option. Online lenders don’t typically require high ranking credit scores or extensive work history records. The convenience of the online application allows for decisions to be sent in a couple of business days. Although this is a great benefit, expect interest rates to be higher than the traditional bank option.
Credit unions are membership-based, meaning that members of credit unions have equal ownership. Any earnings that are incurred goes back into the business. This allows credit union lines of credit to offer lower rates. To use this option, you’ll need to join a credit union. How you do this will depend on the area you are located and what the membership requirements are. Withdrawing funds can be a hindrance to this option. Credit unions have fewer ATMs and lack mobile banking capabilities.
You’ll need to prove to lenders that you are able to pay back what you borrow, and you’ll do this by submitting business financial documents. The application will require:
- Personal information
- Bank statements
- Financial statements
- Legal documents
- Stakeholder information
- Tax returns
- Debt schedule
All these documents help lenders to verify identity, financial stability, existing debt, and income taxes. If all documentation shows a growth trend and a strong financial responsibility, the higher chance you have of getting approved for a line of credit on favorable terms.
If you’re thinking “I don’t have a strong cash flow” or “My business is new, and I don’t have a lot of work history,” don’t give up on the idea that you’ll automatically be rejected. Lenders will require something to back up the line of credit. The typical collateral accepted is inventory, machinery, real estate, and accounts receivables. However, lenders will sometimes ask for personal collateral if you are unable to provide other collateral needed. Examples of personal collateral are houses, cars, stocks, and cash.
When securing your business line of credit, banks and lenders will require you a corporate guarantee, meaning that the company guarantees repayment. Sometimes banks will require owners and shareholders to guarantee the line of credit. This is another precaution that lenders take to protect themselves from a loss. Agreeing to a corporate guarantee will help to secure your line of credit.
Positive Cash Flows
Business lines of credit are for the times when your company actually needs them. If you’re applying for a line of credit when you need it, there’s a chance your cash flows are not performing well. Or your credit score may have decreased falling behind in payments. The best time to apply for lines of credit is before you need it. When applying before you need it, you’ll have a higher chance of being approved for a line of credit with good terms and rates. Since you’re only charged interest on the amount you borrow, securing your business line of credit for the future won’t cause you to owe anything until you use it.
Securing and maintaining the line of credit require lending covenants. Covenants are the items that your business are expected to follow to maintain their line of credit. Examples of covenants are:
- Maintain agreed on net worth
- Not to exceed certain debt amount
- Repay the line of credit in full occasionally
- Advise the lender of any major changes
- Comply with financial ratios
Following these agreed-upon covenants helps to secure that your line of credit remains in good standing.
Securing a line of credit for your business is sometimes more difficult than it seems. Lenders will review business and personal qualifications, cash flows, collateral, and your ability to repay debt. When applying for your line of credit, there are many options, and picking the right one will vary based on your and your business’ needs.