As a small business owner having access to cash continues to be a growing concern during these tough economic times. The majority of business owners prefer a line of credit because it allows a business to establish a significant amount of cash on demand to make purchases that are too large for a credit card and too small for a loan. However, when it comes to qualifying for a line of credit many small business owners are left in the dark.
First of all, the ideal time to apply for a business line of credit is during times of growth and cash flow. Banks are more likely to approve a credit line to a business when it doesn’t need the funds compared to one that is financially strapped. I would strongly encourage you to adopt a ‘dig your well before you get thirsty’ philosophy for your business.
If you think you’re business is just making it fine despite the current economic times and you don’t need the credit line think again! The reality is that your business will at one point require an influx of cash in order to cover unforeseen operating expenses, development, expansion, legal fees, inventory or a range of other items that a business may require in order to grow.
So when you apply for a line of credit and your business is coming from a position of financial strength such as having a strong bank rating, business credit scores, good cash flow and so on the risk is greatly reduced and your chances for getting approved are much greater compared to applying from a position of weakness.
Secondly, it’s much easier to get approved for a $50k line of credit compared to a $100k line of credit simply because of the documentation and amount of financials required on larger credit lines. Most banks only require a low 5 bank rating, a favorable business credit rating, and personal credit scores of 680 or greater to approve a $50k line of credit.
If you are applying for a credit line greater than $50k than you end up having to also provide 2 years of personal and business tax returns, profit & loss statements and financial statements. So you can see the difference in documentation is substantial when it comes to the amount of credit that you are applying for.
Here are my ‘Four Factors to Qualify for a Business Line of Credit’
1. The first factor is your bank balance rating. You will want to aim for a $10,000 balance which rates your business as a “Low 5″.
2. The second factor has to do with how you manage your business bank account. It’s important to avoid bouncing checks at all costs!
3. The third factor is your business credit reports -D&B report, Small Business Equifax, and Corporate Experian should reflect a solid business credit history and scores.
5. The fourth and final factor is having a personal credit score of 680 or greater.
These four factors can improve your chances for getting approved for a business line of credit. The important thing to remember is that banks are in the business to lend money and they make money from the interest they charge. So when they do lend or extend a line of credit to a business there is an amount of risk involved which they want to limit as much as possible.
Prior to applying for a line of credit you can minimize this risk by complying with the four factors I’ve outlined for you and have full confidence in knowing that qualifying for a business line of credit is just an application away.