A line of credit is an option that allows you to obtain financing for your business, as well as tap into the money when you need it says Paul Haarman. It’s a long-term loan that doesn’t have regular repayments and instead, offers better interest rates than a short-term loan.
Line of credit is the best option for businesses that need financing without having to apply for a loan. You can also use it if your cash flow falls short of meeting your business’s needs. The good news is, you can provide all financial records related to your venture in order to apply for a line of credit.
The next question would be how much could you borrow with the line of credit? Banks usually offer 50% – 80% of business’s annual revenue as maximum amount. So, before applying for one, make sure that your account balance will not go lower than 10% which means you should have 20% or more extra money at hand during lean periods!
So here are 10 questions your banker might ask you before approving the line of credit you’re applying for:
- What is your business legal structure? (Sole Proprietorship, Partnership or Corporation?)
- What is your credit history? If you have bad credit, then it might be a bit more difficult to get approved for a line of credit.
- How long has been your business in the market? The longer is the experience, the better your chances at approval are.
- What is your net income after taxes per month? Higher-income means higher chances of being approved with a loan or a line of credit.
- How much do you currently owe on loans and other liens? Having many personal debts can affect your application negatively so make sure to clear them before applying!
- Do you have a co-signer for this line of credit? If yes, whether they have good financial standing or not?
- What is your employment background and income history? Remember that this line of credit is issued in the name of your business so you have to be prepared for a thorough investigation on it, before being approved!
- How much capital do you need and for what purpose? Banks usually only approve short-term loans if you’re looking for smaller amounts while long-term loans require larger amounts which means more scrutiny on your project or investment. You may also want to ask about their collateral requirements (what they’d accept as security) and whether they’ve already lent money to companies like yours before (if yes, there’s no point in applying).
- What kind of interest rate would you be willing to pay? A higher interest rate means your business will have to pay more which is why you should ask the bank for a lower interest rate.
- Do you want an open or closed line of credit? Open lines are cheaper but can be turned into loans anytime, while closed lines require pre-approval before using the funds.
So there you have it! If you’re thinking about applying for a line of credit, make sure to answer these questions first and contact us if you need help with your application process says Paul Haarman.
What is a line of credit?
A line of credit is an option that allows you to obtain financing for your business, as well as tap into the money when you need it. It’s a long-term loan that doesn’t have regular repayments and instead, offers better interest rates than a short-term loan.
How much can I borrow with a line of credit?
Banks usually offer 50% – 80% of business’s annual revenue as maximum amount. So, before applying for one, make sure that your account balance will not go lower than 10% which means you should have 20% or more extra money at hand during lean periods.
What are the requirements to apply for a line of credit?
You’ll need to show your banker that you’re able to repay your loan along with paying interest, which means proving that your business is stable enough to maintain an account balance explains Paul Haarman. Additional requirements may include how long you’ve been in business and whether or not you have any personal debts.
How do I apply for a line of credit?
You will need to fill out the application form, provide all financial records related to your venture and follow up with phone calls. The next step would be meeting with your banker once they approve the financing option!
Having your own line of credit can be extremely important for any entrepreneur, small business owner or startup. It’s better to be prepared and know what you’re getting into before starting your application process.
If you need assistance with starting a business, applying for funding, understanding different business structures or developing a marketing strategy feel free to contact us anytime! We’d love to help you out as much as we can.