Business Lines of Credit: Everything You Need To Know
A business line of credit is a financing tool that can help companies manage cash flow, particularly during periods of growth or while waiting for payment from customers. Depending on the source, you may need to take different steps to qualify.
Bank Lines of Credit
Many commercial banks offer business lines of credit. To qualify, both the business and owner may need to have demonstrated on-time payment histories over the past few months. If the credit score is low or there are instances of late payments, start making on-time payments immediately. Correct any errors found on the reports before a lending officer reviews your credit history during the loan application process.
Business owners should also plan to carefully manage their personal and business checking and credit card accounts during the months before applying for business lines of credit. Make sure there are no bounced checks, late payments or credit limit overages on your accounts. If your bank requires the business to meet debt-to-income ratios or other lending covenants, make sure you are meeting those requirements.
Build credit history by registering your business with credit agencies that track business activity, such as Dun & Bradstreet, Experian and Equifax. Review your records regularly to ensure they are accurate and up-to-date.
Prior to applying for any type of bank loan, it can be helpful to build a relationship with your account manager. Educate him or her about your business to help develop a comfort level in preparation for applying for credit. Bankers may also want to see a business plan that describes the business model, growth plans, and how the line of credit will be repaid using future revenues.
Vendor Lines of Credit
Vendors that do not require immediate payment are effectively supplying short-term business lines of credit. Depending on the length of time given for repayment and the dollar amount of the credit, you may need to provide financial information to qualify for payment terms. Credit cards, utility companies, phone and internet providers, web hosting companies and other vendors may not require payment after billing for as much as 30 days. Credit terms such as these may be provided at no charge, or you may forego a discount when you choose to delay payment.
Cash Flow Management
Regardless of the source, using business lines of credit wisely can help you manage cash flow. Put your business in the position to qualify for credit before you need it to increase your chances of receiving favorable financing terms.