Tips for Getting a Business Line of Credit (Part 1)

A  line of credit is one of the best financing tools available to small businesses. It’s commonly used to meet short-term working capital needs, such as plugging cash flow gaps, funding accounts receivable, and buying seasonal inventory.

In the current tight credit environment though, getting and keeping a small business line of credit takes a little more time and effort than it did in the past. Here are five ways to improve your chance of receiving approval on your line of credit application.

1. Start with your accountant. Before approaching a bank to talk about obtaining a line of credit, it’s a good idea to first talk to your accountant about your specific financing needs. This will prepare you to explain why you need a line of credit and exactly how you plan to use it.Different banks tend to cater to different kinds of businesses, so it’s good to start out with a bank that specializes in companies of your size and in your industry, if possible.
2. Prepare your financial statements and tax returns. Depending on your company’s history and credit rating, the bank will require various levels of financial statements and documentation to help it analyze your credit request. Unless yours is a very established business with a long history of strong credit, you’ll probably need to provide: 1) current and year-end financial statements from the past two to three years; 2) business and personal tax returns from the past two to three years; 3) a personal financial statement; and 4) accounts-receivable aging schedules and current inventory reports.
3. Consider your collateral. Unless your business possesses the highest credit rating, you will likely be asked to pledge some sort of collateral. Banks accept three primary types of collateral: accounts receivable, inventory, and business assets (equipment, computers, furniture and fixtures, etc.). The bank may also require a personal guarantee for the line and/or the pledge of a personal residence as additional collateral.
4. Update your business plan. If you have a business plan but it has been sitting on a back shelf for the past few years, now would be a good time to dust it off. It doesn’t have to be a 100-page opus. A simple, concise document with a well-written executive summary and appropriate and timely supporting documentation will go a long way toward showing a banker that you’re serious.
5. Demonstrate your sources of repayment. Not surprisingly, a bank’s primary concern is how its loan will be repaid. So be prepared to show specifically where the funds will come from to repay the line. The bank will want to see that you can repay the line from cash produced via the conversion of assets generated in the normal course of your business. In other words, be prepared to show the bank that your business is profitable enough to maintain normal operations while still servicing the debt, and be prepared to demonstrate that cash used to repay the debt will not be diverted to other uses, such as purchasing new assets. In that case, a term loan would be more appropriate.