NFIB

Qualifying For a Line of Credit
08/ 18/ 2003

by Tamara E. Holmes

One of the best ways to keep your business going when cash gets tight is to have a line of credit available. A business line of credit is an agreement with a bank, stating that the bank will lend your business up to a specific amount of money over a set period of time.

You can use the money for anything, ranging from making payroll to buying new equipment, and while the money is always available, you only pay interest on the amount that you actually use.

The benefits of a business line of credit are many, but it is not always easy to secure one. When deciding whether to offer a line of credit, banks look at a range of criteria such as your business plan and your personal financial history. While a sound business plan and strong financial history can help you secure a line of credit with a bank, it also helps to understand what factors are important in the eyes of a loan officer.

A line of credit can be secured or unsecured. In issuing a secured line of credit, a bank takes into consideration what assets you already have as a business owner. In doing so, the bank lowers its risk. The booming real estate market, for example, has led some banks, including Cleveland-based KeyCorp and San Francisco-based Wells Fargo, to offer business lines of credit tied to borrowers' home equity.

When banks issue unsecured lines of credit, they're taking more of a risk. Loan officers consider your past credit history and the likelihood that your business will grow enough to pay back any funds that you use. As a result, it's often harder to qualify for an unsecured line of credit.

So what do financial institutions look for?

First of all, they want to know that your business is financially healthy. To determine this, they may look at gross annual sales or revenues, the amount of money in your business checking account and the length of time your business has existed. If your business is relatively young, they may ask to see a business plan or financial projections.

Your personal credit history will also be evaluated, particularly if your business does not have a history of producing much revenue. Among the personal credit information that may be considered are liquid assets, real estate, personal credit card debt and other personal loans. Your credit score will also likely factor into the decision process.

Some financial institutions don't offer lines of credit to start-up companies at all, but rather require that a small business has been running efficiently for a set amount of time, such as two or three years. On the other hand, many banks have programs geared specifically toward start-up companies. In such cases, banks may use the business owner's personal tax returns for the past few years to determine what his or her earning power was prior to starting the business.

Once you secure a line of credit, the terms are reviewed by the lender on an ongoing basis and can be canceled if the rules of the agreement are broken. So if your credit rating changes significantly or your business is not fiscally responsible, your line of credit can be revoked.

However, if you use your line of credit wisely and act responsibly with your business and personal finances, you can ensure that you have access to enough cash to keep your business flowing.

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