Business Line of Credit: The Five Essential Questions You've Been Meaning to Ask

Not too long ago I did a podcast covering how to obtain a business line of credit.  From that interview I have assembled a few of the most popular questions that I'm sure will help you on your path to establishing business credit for your company.

Why is this one of the most popular forms of business loans?

Well, there are a couple of reasons why a business line of credit is so popular. First of all, it allows your business to obtain a large sum of cash, what I call cash on demand and it allows it to make purchases that are either too large for business credit cards or too small to take out a business loan.

The second reason why it’s so popular is because of the easy access to cash. Typically, a business line of credit works like a revolving credit card but the major difference is that they have much lower interest rates and higher available credit limits than a revolving credit card.

The third reason why it’s so popular is the payment flexibility because some banks even offer special features that require monthly interest only payments to be made by the business and this allows the business owner to have small payments if they tap into their corporate credit line.

Can I qualify if I have not been in business for a long time?

Yes, but banks typically prefer that a business has at least a two-year track record of being established. If you’re a startup company the bank will require a personal guarantee and may require that you put up some personal collateral to secure the line of credit. Keep in mind that your approval is going to be based on your business’ past revenues, cash flow, bank rating, small business credit report and your FICO score.

How do I qualify if I had bad personal credit?

As a temporary solution while you're raising your credit scores you can transfer 100% of the business to your partner with the strong personal credit profile. The transfer of ownership is done privately and can be easily filed in your corporate record-keeping book.  Make sure you consult with your CPA and attorney if this is something that you’d like to do but remember, the transfer of ownership can be transferred right back after you finish applying for a corporate credit line.

More articles from AllBusiness.com:

• Can My Start Up Build Business Credit?
• Find the Best Business Credit Card by Looking for These 7 Features
• 19 Steps to Building Business Credit Without a Personal Guarantee
• When You Should (and Shouldn’t) Use a Line of Credit
• Should I Finance My Business With Credit Cards?

What amount should I apply for?

It’s a lot easier to get approved for a $50k line of credit compared to $100k line of credit simply because of the documentation and amount of financials required on larger credit lines. You see, banks require much less documentation for credit line requests below $50k. For example, you will have a much better chance for qualifying for let's say a $25k credit line if you have a low five bank rating, a solid business credit report, and personal credit scores of 680 or greater.

But, if you’re applying for a credit line greater than $50k than in most cases, you end up having to also provide two years of personal tax returns, two years of business tax returns, profit and 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’re applying for.

Can I apply for multiple business lines of credit?

Yes, you can and should always diversify your business credit and banking relationships. A tough lesson that many small business owners faced as a result of the credit crunch was putting all of their banking and credit lines in one basket. As soon as their credit line was cut their business was strapped with no other access to credit.

When you establish multiple small business credit lines, it puts you and your business in a much safer and stronger position so if one of your banks happens to reduce or even cancel your credit line; you still have several other ones readily available to you.

One word of caution about this is don’t open more than three business bank accounts within a 90-day period because your business could possibly get stuck in chex systems which is the ratings systems that banks use when you open up a business bank account.

Whatever your situation is in your business, if you think you don’t need the credit right now or you don’t need the cash then that's the ideal time to apply if you qualify.

Which bank are you having the most success with?

RELATED: 6 Tools to Help Entrepreneurs Build Better Credit to Access Financing