5 Tips for Getting Approved for Business Lines of Credit
There are many reasons your company may need an influx of cash, sometimes without warning. Lines of credit are a great financial tool because you only pay interest on the borrowed amount, unlike a traditional loan that provides the full amount whether you’re ready to use it all or not. If you are considering applying for a credit line, here are some tips to get you prepared before you meet with your banker.
1. Credit Rating
One of the first things a lender will look at is your creditworthiness. To avoid any surprises, it’s a good idea to look at your business credit rating in advance. You’ll want to be prepared to answer questions and explain any negative items on the report. If the business is less than a few years old, or its credit rating is not ideal, you may also want to make sure that your personal credit rating is in good shape if you need it as a backup.
2. Business Plan
Another essential factor in the lender’s credit decision is how you plan to pay the money back. Before submitting your application, review your business plan. Make sure it is up to date and that it lays out a reasonable progression of steps you plan to take to keep the company going. Once updated, let a trusted friend with some business savvy look at it to make sure you haven’t overlooked anything critical.
3. Collateral
Business lines of credit may or may not be collateralized. If you pledge assets to support the loan, be aware that if you default on the loan, you will lose those assets. Alternatively, an uncollateralized loan may require a personal guarantee, meaning that if the company can’t repay the loan, you will be personally responsible for the balance owed. Weigh these two options carefully, and be prepared to state your preference if asked.
4. Personal Financials
If the lender asks for a personal guarantee as a condition of the loan, be ready to provide personal financial statements. Either find a template online to help with formatting or ask your accountant to assist you. The financials will include a listing of your assets, including cash in the bank, as well as any debts.
5. Documentation
In addition to the personal financial statements that will include a balance sheet, income statement and cash flow report, you’ll probably need bank statements for the past six months and tax returns for the past few years. The lender may want to see personal tax returns as well as those for the business.
Credit lines provide access to cash when you need it and help keep your business running smoothly without fear of cash flow problems.
