How to Get a Business Line of Credit
Written by Eric info@acsecapital.com
I've been involved in business for some time and now I have decided to make a commitment to providing small businesses with truely helpful information.
Understanding Business Line of Credit
Would you like to have access to a Business Line of Credit and draw funds when needed? Imagine how many times over you would be able to expand your business with a Business Line of Credit.
It is very convienient to have a facility like this with low interest rates, and reasonable terms.
There is usually the opportunity to have a fixed limit (typically we see anywhere from $10,000 to $1,000,000), with repayments being paid most times as a ballon or pay as you go usage.
Unlike a traditional business loan you can draw on small business line of credit to address cash flow deficits. When this fails to be an option there is always invoice factoring loans that may or may not be applicable to you. See our post on invoice factoring loans.
The lending entity that provides you with a business line of credit can either make the process easy or difficult for you to obtain.
Having mentioned that, I would iterate that they should be fairly straight forward to get providing you with the relevant requirements and criteria needed.
Thanks to technology there are a few companies out there that are embrassing AI and Machine learning to help with the tediousness of underwriting.
Allowing a lot of the underwriting and funding process to be handles online.
Some of the items you will need for a business line of credit are, drivers license, voided business checks, most recent bank statements, Income Statements, Business tax returns, Personal tax returns and credit score.
Table of the typical Business Line of Credit you would see from your Lender
Business Line of Credit Types | Features |
|---|---|
| Secured LOC | This line of credit is collateralized. This can be in the form of pledged valuable business property or guarentee |
| Unsecured LOC | There is no collateral pledged towards the LOC neither is a guarentee needed |
| Real Estate LOC | Based on valuable equity in property buy the business or business owner |
| Credit Card | No Collateral needed but based on the credit worthiness of the business |
“As you can see the benefits for a company in need of financing should not be that difficult with a decent track record of profitable sales and retained earnings”
Let’s look a bit more into the different types of Business Line of Credit
For businesses with not much of a financial history, they would be able to qualify for shorter term business line of credit.
Conversly companies with some years in business 3 years or more with the financial records to support that, would be great candidates for business line of credit with a medium term range.
Some of the deciding factors relative to acquiring the maximum funding possible are good credit rating, good financial history, positive revenue growth and proof of ownership.
“Lenders like businesses that show first and foremost, Sales, positive EBITDA (Earnings Before Interest Tax Depreciation and Amortization) and the credit worthiness side of things include good money management. This surely allows for a LOC to be extended to a business of any kind”
How should a Business Owner approach a Business Line of Credit?
“Some businesses have varying degrees of payment terms with clients which causes revenue to fluctuate. This can be payment in 7 days, 14 days, 30 days up to 120 days.”
“How it works for companies that are trying to access a business line of credit is to showcase your revenue, expenses and EBITDA along with your plans for the business line of credit and how it is going to be used to benefit the business.”
This could be by showing how it will keep your payments to suppliers consistent relative to sales demand or how it may help with operational expenses in cyclical situations, or illustrating how the company would use the funds to purchase more heavy equipment to produce more units to supply demand.
I am sure you can see how the infusion of cash is tied to the demand of your products or services.
Which is why it is so important to show positive Sales. What would stand out even more is if you can show sales growth over a period of more than 6 months to a year and beyond.
However a downward trend in sales is never what a lender wants to see but if you have a reasonable case, as to the decline in revenues you may have a case to still be granted a business line of credit.
Maybe your supplier is out of stock of a particular good or one of your machines is down for repair and after repair or replacement, sales would normalize or increase.
“Whatever the reasoning for the decline it should show that it is a temporary issue that can be remedied and not relative to a decrease in demand.”
In some cases where a decrease in sales is relative to demand then you may be able to make a case that with additional sales and marketing it could be fixed, also that with additional funds the business can hire new sales reps or conduct promotions to curb the decline.
Though in these instances you would have to prove that sales volatility is directly correlated to Sales and Marketing spend.
A few important questions to ask yourself:
Would my business be a good candidate for a business line of credit?
- That’s one of the first questions you would have to ask.
- Secondly does my business need an infusion of cash to solve an operational problem my business currently has?
- Thirdly, if yes to the second question, then how would I use those funds in a strategic way which would show over time that it was used with good financial management.
Subsequent to that, would my business be able to service the credit payments relative to how much is draw and the stipulated payment covenants.
If you carefully ask these questions you would be well on your way to receiving an offer of a business line of credit.
“As I said in my last post. Number don’t lie. So be sure to present the best possible version of why you are doing well or why you would be doing well once you get the business line of credit.”
Another line of important questioning is, could I, or my management team manage these funds well enough to provide the intended results for the business and show financial prudence?
Do I have alternatives to acquiring a business line of credit? Which means, are there innovative ways to acheive the intended outcome without taking on more debt to solve those problems?
“Could my team develope strategies that can ensure an increase in Sales.”
“Which at the end of the day is looked upon favorably by lenders.”
Lastly, a business needs to evaluate whether they can continue business without the additional funds.
This is a critical question because in business there are fluctuations in sales all the time. As well as fluctuations in spending needs and patterns all the time.
A business owner needs to also deduce whether every time they have a shortfall of cash, to use outside funding to solve their problems.
This can be potentially dangerous with any type of debt or credit solution. Only the business owner and officers of the company make this decision and they have to be cautious that they don’t take on too much credit.
“On the other hand, the over extention of credit to a borrower is exactly what lenders try to assess when underwriting debt or credit.”
In order to get a business line of credit you have to be prepared. Prepared for what? Prepared to present your business in the right way.
Which is with the following.
Revenue, Revenue Growth, good Financial Management, Positive EBITDA and I would suggest business plan summary.
The reason why I am adding business plan summary is because it is getting much more competetive for the same capital.
Though dry powder (funds financial institutions have not deployed yet) is still very much available, many lenders are squabbling trying to evaluate the best places to invest those funds.
Therefore you want to stand out from the crowd or at lease be a part of the crowd that fits into the lenders prioritized list of businesses to lend to.
The Covid-19 environment has made it a bit more difficult for the average small business facing a reduction in revenue to qualify for a loan or credit.
This means that businesses really have to go beyond the call and prove that they are worth the investment and that they are good for it.
“So buckle your belts and get to working on putting together your information in a professional to be presented to your lenders.”
At the same time, take a moment to figure out if there are ways in which you can come up with an innovative idea or method to solve your business problem without seeking debt or credit.
You may be surprized with what you may come up with. For many great companies this is exactly what made their Brands household names.
Though if you need it you need it and it would be best that you ensure you present your application in the best way possible.
So best of luck out there getting it right.
I’m not sure whoever thought that business was easy and that business owners live the most stress free lives. I remember growing up thinking that based on what I saw on the limited Television we had back in the days. But boy have I learnt a totally different story over the years. Though I agree with one thing. Which is most times a take money to run a business but ultimately it takes guts to run a successful business.
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