How Do I Qualify for a Business Line of Credit?
What is a business line of credit?
A business credit line is a predefined sum of money that you can draw from as needed and repay afterward. As opposed to a conventional loan facility, you can access the money whenever you require it for inventory, supplies, or operating costs. You can usually return your line of credit at any time without incurring any early repayment penalties, unlike a term loan, which entails a fixed monthly amount.
Credit lines are “revolving,” which is a key distinction between them and term loans. This entails that you may use the money up to the allowed limit. You repay the money you have already used to make it available once more. Term loans, in contrast, are a one-time, interest-bearing lump sum type of loan that you use just once.
What are the qualifications for a business line of credit?
You must go through a rigorous application process in order to be accepted for a bank’s business line of credit. The potential lender will examine your financial records, assets, and other factors when you apply.
Here are a few typical conditions needed to obtain a fresh business credit line from a large lender. Do keep in mind that online lenders may have fewer requirements to process your application, and it might be easier to get a business line of credit from them than from banks.
- Collateral – This could comprise, but is not restricted to, equity in real estate, real stock, machinery, or accounts receivable. By using that collateral as security, your company lowers the lender’s risk and guarantees the loan.
- Business history – Before a business may be approved for a credit line, the majority of lenders have an operational experience requirement. Only companies that have been around for a minimum of two years may be taken into consideration by some lenders (such as large banks). This requirement may be more flexible with online lenders, so it may be a better option for newer businesses or startups.
- Financial statements – To evaluate your company for a line of credit, most banks want financial statements and income tax returns.
- Proof of profitability – In order to qualify for a commercial line of credit, your company must make money. It’s likely that you may be required to submit documentation of your business’s profitability when you apply. This can be in the form of a profit & loss statement or sometimes just your bank statements.
- Financial ratios – The lender can determine how well your organization is performing by comparing a few key economic factors. For example, the debt-to-equity ratio and the current ratio of your company.
Be sure to ask your lender for a complete list of documents and details they need to process your application.
What are the benefits of a business line of credit?
All businesses require financial resources to function but occasionally there isn’t nearly enough working capital on hand when you need it. You could need to buy a costly piece of new equipment, or you may be expecting your favorite large customer to settle their invoice. These kinds of circumstances might have a negative impact on your cash flow and perhaps jeopardize the stability of your company.
However, if you have a line of credit established, you may face these difficulties with assurance, knowing that you already have access to the money you’ll need.
Some of the most popular benefits of having a business line of credit are:
- Continued cash flow during slower months
- You only pay for the amount you use and not your entire line of credit
- Your business can adapt to its demands and also seize new opportunities for growth with a line of credit.
- You can build a solid credit history for your business to avail of larger loans or credit lines in the future
While a business line of credit is a smart way to fund your requirements, do keep in mind that you must have all the necessary documentation to be eligible for one.
What documents do I need to apply for a business line of credit?
Apart from the above list of qualifications, you may need certain other documentation to qualify for a business credit line. For example, proof of your personal credit history, property documents if you’re offering real estate as collateral, and any other business documentation you may have.
This requirement differs from lender to lender, so make sure that you ask for a full list of required documents before applying for a line of credit. The below are typically the minimum of what is requested:
- Recent Balance Sheet
- Recent Profit and Loss Statement
- Last two years of tax returns
- Last 3-6 months of bank statements
- Debt Schedule if applicable
- Asset or equipment list if applicable
What other financing options are available to me
As a business owner, you may feel that a business line of credit is not the best option for your needs. In such cases, you may want to consider other financing options that your lender can offer. Depending on the lender, you may have access to these other types of financing:
- Purchase order financing – this type of funding is similar to a typical business loan, but it can be used only for purchasing the raw material or stock required to fulfill an order. PO Funding right option for you if you need funds only for buying materials to fulfill a particularly large order for which you don’t have sufficient stock.
- Accounts receivable factoring – In order to have quick access to cash, SMEs who use this sort of debtor finance trade their receivables to a third party at a discount. Businesses get an alternative to borrowing money to finance their project by factoring their accounts receivable.
- Term loans – With a term loan, borrowers get a one-time payment in return for certain borrowing conditions. Term loans are often intended for well-established small businesses that have strong financials. The borrower consents to a specific repayment plan with a variable or fixed interest rate in return for a predetermined sum of money. However, note that term loans may require substantial down payments.
What are the risks of taking out a business line of credit?
Here are a few risks to bear in mind before applying for a business line of credit. You may want to discuss all these points with multiple lenders to find the one that reduces these risks best.
- It can be expensive, even though it’s much less expensive than a credit card or merchant cash advance.
- The application process is long and extensive. The lender will require substantial documentation to even be eligible for a credit line.
- Depending on your credit history or the lack thereof, the credit limit you qualify for may be too low to meet your business needs.
- While most lenders are legitimate, you must look out for any scammers.
- Going through a traditional lender such as a bank can be a difficult process. It can be hard to meet their qualification requirements. However, the process and requirements may be far easier and achievable with online lenders.
If you are ready to explore business lines of credit please get in touch with a Star Funding representative today. You can APPLY HERE to start the process right away.