Business owners who need funding are always looking for a line of credit. This funding option is very flexible and can offer working capital for your business. Moreover, it can be quite useful for fast-growing businesses that need expense money.
Lines of credit tend to be affordable because you only pay interest on the portion that you have used. However, getting one for your business is not easy, even those backed by SBA can be challenging to acquire. Securing a line of credit is hard because banks only lend to business owners with good credit scores, cash flow, and collateral.
If you want to learn more about business line of credit requirements, keep reading.
Business qualification requirements
Lending institutions such as banks needs to examine your business to determine whether you qualify for a business line of credit. The bank examines your past and current revenues, assets, etc. and this extensive process could take weeks. Here are the main requirements that you should have:
Time in business
A lender will extend lines of credit to those companies that have been in operation for more than two years. This shows the lender that your company has some experience and longevity. However, you can get a line of credit for your startup if you personally guarantee the loan, have good credit, and have solid collateral.
Profits and revenues
To qualify for a line of credit, you need to have a profitable company with good revenues. Lenders consider your revenue as the principal form of repayment. For this reason, your revenue and profits should justify the size of your business line of credit.
If your company is does not produce any revenue and is unprofitable, you should provide collateral to get a business line of credit.
Lending institutions only lend to businesses that have collateral to back their loans. What is collateral? It is a type of asset that can be used to repay your loan. Banks usually look for real estate, accounts receivable, and machinery as collateral.
Many lines of credit are acquired by collateral. The lender will secure your collateral by filing for UCC Lien, which gives them top priority when it is time to collect. If you are a small business owner, you might be asked to pledge all your assets if you want a line of credit.
Most lines of credit require a corporate guarantee, which means that your company has to guarantee the repayment. If your business is a subsidiary for a larger company, lenders will ask the parent company to give a guarantee. The company owners and shareholders might also have to guarantee your line of credit.
A line of credit usually has a lending covenant, which refers to the rules that your business should follow to keep its line of credit active. When you default on a covenant, you could end up paying extra fees, which could lead to the termination of your line of credit.
Each lending institution has its own set of covenants, which could include:
– Maintain a certain net worth
– Agree to confession of judgment
– Maintain a certain liquidity
– Comply with financial ratios
Owner and shareholder requirements
Most lenders will also evaluate the owners personally to check whether they are good credit risks. They review the personal experience, personal assets, and personal credit of the owners. The lender will also run a background check to find any issues that could affect their decision to grant you a loan.
The SBA offers a few programs that aid business owners to get funding. The most popular being the 7(a) program.