How to qualify for a business line of credit?
The ideal situation for a business is to have a cash-to-cash cycle based solely on commercial credit. In other words if you are able to negotiate longer payment periods with your suppliers and shorter payment terms with your own clients your business will never need an extra injections of cash from your own pocket and your business will run smoothly exclusively on other people’s money.
Unfortunately, the reality is not so pink. There is an industry average for payment terms negotiated with your suppliers and if you are a start-up or a small business you will probably exceed this average. Same with your own clients if you don’t have a position of power on the market probably you will not get better payment terms.
There is a solution for this problem that does not require to dig deep into your pockets: the business line of credit. Lines of credit accommodate seasonal or regular cash demands and will allow you to build inventory in anticipation of high sales periods.
You can qualify for this product offered by many banks if your business is able to generate enough money to pay back the loan. Of course the banks will also require a risk umbrella under the form of collateral and/or covenants.
Let’s look at this requirements systematically:
Time in business
Banks require a minimum 2 years of business operations to open a credit line. As a start-up you also get a credit line but the owner has to guarantee personally for the line of credit so your credit worthiness has to be adequate.
Revenues and profits
Any lender opening a line of credit for a business will examine the business revenues and profitability for they dictate the capacity of repayment. The size of the credit line will also depend on generated revenues and profitability. Inadequate figures for this items immediately trigger personal guarantees for this loan.
Lenders also examine the health of your business, so they examine some of your financial ratios: current ratio, debt to equity and debt service coverage ratio. At least for these ratio limits will be established that had to be followed while the line of credit is open.
Collateral is also required to secure most credit lines. Accounts receivable, inventory may be considered as good a collateral as equipment or real estate. Some financial instruments are also accepted. An UCC Lien, is not unusual for the document gives banks priority if collection becomes necessary.
Most lenders also require a corporate guarantee, meaning a promise from another company to repay the loan for the smaller company opening the line of credit, if worst come to worst. Usually the guarantee comes from a parent company or a company related to the one requesting the credit line.
Lending covenants are also customary when contracting a business credit line. The covenants differ from one lending institution to another but they usually include: a certain level of net worth, liquidity and debt, periodical repayment of the line of credit, inform the lender on material changes, etc.
Other Useful Resources By Plousio
- What is a business loan?
- Credit Score Explained
- Why borrow money to purchase business equipment?
- Business Loan Underwriting Explained
- Interest Rates & Factor Rates Explained
- Why business loans get declined
- Business bank account requirements for loans
- Preparing for a business loan
- Getting approved for a business loan
- How to qualify for a business line of credit?
How Does Plousio Work?
Plousio makes it easy to find a great small business loan with the most competitive rates. Simply answer a few questions, select a lender and fill out our account creation form and you’ll start receiving new offers right away! With 3 easy steps, you can get your death care business funded!
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Step #2: Receive the most competitive offers
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