For small business owners, gaining access to capital continues to be a concern. The majority of business owners prefer a line of credit because it allows them 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 business line of credit, many small business owners are in the dark. How do you go about it?
First of all, the best 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 than when it’s financially strapped. I would strongly encourage you to adopt a “dig your well before you get thirsty” philosophy.
If you think your business is doing just fine despite the current economic times and you don’t need a 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 issues that a business may face in order to grow.
So when you apply for a line of credit and your business is coming from a position of financial strength — if you have a strong bank rating, business credit scores, good cash flow, and so on — your chance of getting approved is much greater than if you apply from a position of weakness.
Second, keep in mind that it’s much easier to get approved for, say, a $50,000 line of credit than a $100,000 line, simply because of the documentation and number of financials required for larger credit lines. Most banks only ask a low 5 bank rating, a favorable business credit rating, and personal credit scores of 680 or greater to approve a $50,000 line of credit.
If you’re applying for a credit line greater than $50,000, you’ll also be asked to provide two years of personal and business tax returns, profit and loss statements, and financial statements. The difference in documentation is substantial when it comes to the amount of credit you apply for.
Follow these five steps to qualify for a business line of credit:
- Bank balance rating: This is the average minimum balance maintained in your account over a three-month period. A $10,000 balance will rate as low 5, a $5,000 rate is mid 4, $999 is high 3 and so on. You should maintain a minimum low 5 for at least three months. If you don’t have at least a low 5, most banks will assume your business has little ability to repay.
- Bank rating cycle: You’ll want to maintain at least a low 5 for the three months prior to applying for a line of credit or larger loan.
- Account management: NSF (bounced) checks destroy your bank rating. From this point forward, NSF checks are something you can’t let happen. I suggest you add overdraft protection to your account as soon as possible.
- Business credit reports: Dun & Bradstreet reports, Small Business Equifax, and Corporate Experian should reflect your solid business credit history and scores.
- Personal credit score: Your score should be 680 or higher.
Maximize these five factors and you can greatly improve your chance of getting approved for a business line of credit. The important point to remember is that banks are in business to lend money and they make money from the interest they charge. But when they extend a line of credit they want to minimize the risk as much as possible.