A small business line of credit can change your company. It offers you flexibility, either managing your cash flow or financing new projects – be they pivots due to COVID-19 pandemic changes, innovations in service delivery strategies, etc.- covering unexpected expenses. In this post, we will step you through what needs to be done for your small business line of credit application to fly off the shelf.

What is a Small Business Line of Credit?

A business line of credit (LOC) is a revolving credit facility that allows you access up to an approved limit. However, paying interest on all the credit available works differently than a regular loan; you are only charged for using it. Such a short-term business loan is suitable for funding immediate cash flow requirements and pursuing growth opportunities.

Assess Your Business Needs

Before applying, straightforward what you plan to use the line of credit for. Is your business needed to supplement cash flow shortfalls, equipment purchases or other working capital expenses? Understand what you require, as this will give me an idea of how much credit you need and, therefore, set the conversation with lenders.

Check Your Credit Score

This will place your credit score under the microscope of lenders. A better credit rating will increase your likelihood of qualifying for a line of credit on more favourable terms. Get a copy of your credit report and check it for errors. Handle the issues and then apply to bring your creditworthiness up.

Gather Required Documentation

It would be best to prepare before applying for a small business line of credit. Here are a few documents that are mandatory to procure:

A Business Plan: This is an extensive document that includes what your business aims to achieve, how you will achieve it and financial projections.

Financial Statements: Current Income / Profit & Loss, Balance Sheets and Cash Flow statements.

Tax Returns: Business tax returns from the last 2-3 years

Legal Documents: Business Licenses, Registrations or Formation and Organization Documentation.

Personal Financials: This is an easy bucket, including individual tax returns and financial statements if you are self-employed or own a small business.

Research Lenders

Lenders do not consistently provide the terms and levels of service you expect. Compare loans with payoff times of one to five decades. Look at their rates of interest, costs, and reimbursement terms, in addition to their credit line. Select a lender that meets your business requirements and financial conditions.

Complete the Application

After you select a lender, complete their application form. You will need to delve deep into the health of your operational and budgeting history and what you are looking for from investors. This includes personal interviews and may include follow-up requests for additional documentation.

Review and Negotiate Terms

Upon reviewing your application, the lender will make you an offer. This offer will be a formal letter detailing the credit limit, interest rate, fees, and payment terms. Please review these terms carefully to ensure that they apply to and coordinate with your needs. You can always negotiate a lender’s terms or ask them to clarify anything you need help understanding.

Understand the Costs

Check out the charges for a small business line of credit, including Annual fees, draw fees, and transactions. This will allow you to sidestep any unpleasant surprises once the credit offer is made.

Finalize the Agreement

Provided the conditions are acceptable, you will be required to sign a credit agreement. This is a legal contract that describes the terms and conditions of this line of credit, including any rights and obligations. Read it through and, where necessary, seek advice from a financial advisor.

Use Your Credit Wisely

Spend responsibly when using an established line of credit. Only draw down the funds you need, and use your credit responsibly, as this will help keep a healthy financing fingerprint. Keep an eye on your account regularly, pay quickly, and follow the terms to avoid being penalized and adversely affecting your credit score.

Maintain Good Relations with Your Lender

Having a good relationship with the lender can come in handy for future credit. Make sure to keep employees up-to-date with your business performance and any changes in your company’s financial situation. Maintaining a good relationship with your lender will also help you get better terms and credit down the line.

Conclusion

The process of applying for a small business line of credit requires a number of steps and considerations, from evaluating your requirements and compiling documents to selecting the ideal lender and responsibly managing the credit. Infusing your business with the cash it needs to grow and understanding how you might secure that financing for many years to come just got a bit more complicated.

Just remember that some key components to effectively managing a small business line of credit are knowing your financial needs and maintaining good habits with regular rent payments on due dates.