How to Get a Business Line of Credit

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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.

Business Line of Credit Cards

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”

Business Line of Credit Offer

How should a Business Owner approach a Business Line of Credit?

Its an amazing feeling when you generate sales for your business. You are even more excited when you generate enough business to pay your cost of goods, operational expenses and pay yourself.

Revenue (Sales) is the life blood of any business on the planet. Without the inflow of cash (or digital cash) businesses would surely die.

“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.”

These payment terms also vary based on industry. This means that if sales fluctuates regularly where every day or every month is not the same, then there may be times where payment to suppliers would vary as well.

Though a company with historical data would be able to navigate whether a business line of credit would be a solution to periods when sales fluctuate downwards.

In the case of lenders assessing the sales of a business, lenders pay close attention to the historical performance of the business, from a sales perspective, relative to forecasting the performance of the business and its ability to service what has been drawn from the business line of credit (if you were to be issued a credit facility). 

“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.

Eric Charles

Managing Director | CEO, ACSE Capital Inc.

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If you are waiting in line for access to PPP funds or just trying to figure out how to get a small business loan then checkout our Lending Marketplace at acsecapital.com and get started with access to Secured loans, Unsecured loans, Term loans, Lines of Credit, Invoice Financing, Asset based lending, Cash Flow Loans, Commercial Real Estate Loans and more. The best time to get started with us is now because we provide you with quick access to capital.

Data Processing and Hosting Services

The Data Processing and Hosting Services industry provides infrastructure used for a variety of information technology (IT)-related activities, ranging from online hosting to automated data entry services.

Over the five years to 2021, businesses have increasingly outsourced their IT infrastructure needs, directly benefiting industry operators.

The advent and popularization of cloud computing, one of the industry’s fastest-growing product offerings, has similarly led to greater demand.

As a result, the industry has fared well during the majority of the five-year period, with revenue expected to grow at an annualized rate of 5.0% to $196.5 billion.

However, the COVID-19 (coronavirus) pandemic is expected to lead to a decline in business investment in industry services, although this was tempered somewhat by increased usage of industry services in other capacities.

Industry revenue is expected to increase 1.7% in 2021, as the overall economy recovers from the economic fallout of the coronavirus pandemic.

Profit is expected to decline slightly over the five years to 2021, as growth earlier in the period is countered by declines in later years.

Beef and Pork Wholesaling

The Beef and Pork Wholesaling industry has experienced favorable conditions over the five years to 2021.

The industry, which serves as the middleman between beef and pork producers and retailers, is expected to perform well as both consumer spending and consumption of beef and pork rises.

Prices of key inputs, such as corn and diesel, have risen during the five-year period, increasing operating costs.

Although operators have dealt with recent studies linking beef and pork consumption to heart disease and shifting consumers’ tastes, the industry has shown resilience as operations have expanded.

Revenue has been on a steady growth during the five-year period.

However, the restrictions placed on the economy as a whole due to the COVID-19 (coronavirus) pandemic led to a decrease of 0.9% in 2020.

This contraction in revenue was offset by the increase in per capita disposable income as a result of enhanced employment benefits and stimulus checks.

As the economy begins to reopen in 2021 and the easing of restrictions occurs, consumer spending is expected to increase due to pent-up demand.

Consequently, research estimates industry revenue to increase at an annualized rate of 2.4% to $91.4 billion over the five years to 2021, with a 2.0% growth in 2021 alone due to the expected economic rebound.

Beer Wholesaling

Revenue growth for the Beer Wholesaling industry has been hindered by shifting alcohol consumption trends among consumers, particularly millennials.

Americans have been consuming less beer and opting for alternative alcoholic beverages.

However, the industry has continued to benefit from laws that prevent the vertical integration of breweries and retailers.

After the Prohibition era, nearly every state enacted a three-tier distribution system, requiring three distinct levels within the alcoholic beverage supply chain, including producer, distributor and retailer.

As a result, beer wholesalers have a protected role, purchasing beer from producers before storing and transporting it to downstream retailers.

Research estimates that industry revenue has grown at an annualized rate of 2.3% to $82.9 billion over the five years to 2021.

Since 2020, the COVID-19 (coronavirus) pandemic has resulted in rising demand for industry operators, with revenue projected to rise 1.0% in 2021 alone.

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