As business lines of credit are very flexible and can give your small business with working capital when required, many small businesses are looking for funding to fund their small businesses regularly seek business lines of credit. The business lines of credit can be helpful if you are a quickly growing seasonal business and you need money to pay for expenses. Additionally, business lines of credit are normally less expensive and easily affordable – as compared to other alternative funding options.
However, getting a business line of credit for a small business is not an easy thing to do. Even the lines that are backed by the government, Small Business Administration (SBA) can be difficult to acquire. Getting a business line of credit from banks is also quite difficult due to the fact that the banks only lend to businesses that have good cash flow, valuable collateral, and a good credit score.
As part of credit line process, the bank and the lender will evaluate your small business to find out if it meets the requirements for a business line of credit. The banking institutions look at your possessions, your previous and current profits, in addition to some other things. This whole credit line process is quite extensive and might take weeks or months. Here we want to share some of the most important credit line requirements:
1) Duration In Business
As previously said the banks and lenders usually offer business lines of credit only to businesses that have been running for at the least two years. But they in return require a business to have permanence and experience in the industry. However, lenders can offer business line of credit to a startup business if the business owner has desirable personal credit score, valuable collateral, and personally guarantee the borrowed amount.
2) Valuable Collateral
Collateral is the basic part of lending process. Banks and lending firms lend only to businesses that have collateral to back the borrowed amount. Collateral can be anything from your assets that can be used to repay the loan amount. Usually banks ask for collateral such as accounts receivable, equipment, inventory and real estate.
Majority of business lines of credit are secured by collateral. The business pledges some sort of collateral to back the loan in case it can’t repay. The lender frequently secures the collateral by means of filing a Uniform Commercial Code (UCC) Lien, which provides them priority if they want to collect. It is also quite common for the lenders to ask small businesses to pledge all their resources as collateral for a business line of credit.
3) Profits And Revenues
To meet the requirements for a business line of credit, your business should be money-making and have revenues. Your revenues are considered by the lender as their standard way of repayment. Therefore, your business sales and productivity should substantiate the amount of line of credit. Unprofitable businesses and businesses that don’t have sales are unable to get a business line of credit unless they provide collateral as a guarantee.
4) Financial Ratios
As a part of credit line process, lenders want to check your business financial ratios. This assessment provides a picture to lenders about your business performance. Every lender has a different sort of evaluation process. At least, you may need to fulfill with fixed charge coverage ratio, current ratio, debt service coverage ratio, and Debt to equity.
Most business lines of credit require a business guarantee that means that the business guarantees the repayment. In case the business is a subsidiary of a big organization, lenders normally require that the parent company offer guarantee. Banks may also require that the business owners and the shareholders guarantee the line of credit.
6) Lending Requirements
Business lines of credit generally have some lending requirements that your business should follow to keep the line of credit active. Defaulting on them can cost you extra fees and charges and also could terminate your credit line. Lending requirements and covenants can vary from lender to lender. Some of them are:
- Comply with financial ratios
- Have certain net worth
- Have certain liquidity
- Don’t burdened with too much debt
- Pay off the line regularly
- Agree to a cognovit of judgment
- Advise the lender regarding post contract amendments