When you begin pursing a business line of credit, it can help to know what criteria the banks are using for evaluation. These factors can determine whether you are eligible for a line of credit and if the terms are in your favor. Once we’ve covered the bank criteria, I’ll walk you through the steps of applying.
• Financial History
When starting out, it is important to know that most banks like to consider a business with a two-year track record and good credit history. With less established history, you may only get a business credit line at a very high interest rate, if at all.
You may also be required to offer a personal guarantee of repayment. As discussed in my book, Finance Your Own Business: Get On The Financing Fast Track we eventually want to get away from personal guarantees, which expose your personal assets to collections against the business. Over time, a business line of credit handled properly can get to a point where the personal guarantee is no longer necessary.
• Your Business’s Credit Score – FICO SBSS
Though most entrepreneurs have never heard of FICO’s SBSS score, it can determine if they are able to get loans, lines of credit or decent interest rates. The FICO SBSS score is different from a person’s personal FICO score, and uses a completely different scoring range. Since January 2014, the SBA has been using credit scoring to prescreen 7(a) loans up to $350,000 with a couple of exceptions (SBA Express and Export Express). A wide variety of factors go into these scores. These may include:
- The owner/co-owner’s personal credit information
- Business credit history, age of the business, years in business, etc.
- Financial data, such as business assets, cash flow, etc.
To gain insight into how you’re ranking up in these categories, here’s a list of available resources:
- You can get two free personal credit scores at Credit.com, updated monthly.
- Creditera offers some business credit scores for free, and a FICO SBSS score is available for purchase.
- You can purchase several different types of business credit reports and scores from the three major credit bureaus.
- DNB (Dun & Bradstreet) offers free alerts to changes in your business credit file.
- See a list of 29+ resources that we’ve compiled for small businesses here.
• Bank Account
Most lenders require small businesses to have a bank account in good standing to qualify for a line of credit. Accounts that have a history of being overdrawn or bouncing checks will be frowned on by the lending institution. Lenders also pay close attention to the average daily balance. This allows them to assess if the business typically maintains enough cash to repay the loan. If an account shows a positive monthly cash flow, the financial institution can more easily assume that the small business is profitable.
How to Apply
1. Start at Your Current Bank
The first place to inquire about a business line is at the bank where you do all your business banking. You can certainly do business with other banks, but we find that many banks are more willing to consider the request of existing customers. Ask for a meeting at the bank and dress for success.
2. Bring the Right Documents
Bring key financial documents to the meeting. These will include:
- financial statements prepared by (hopefully) your CPA or bookkeeper,
- business tax returns,
- entity registration filings
- and trade references (vendors who will vouch you have paid on time).
Each bank may have their own varying requirements so ask ahead of time what to bring to the meeting.
3. Get Dollar Limit & Interest Rate
If things go well you should receive and offer of a dollar limit and set rate of interest. You may be very happy and stop at this point. But if you’re like me, you’ll want to see if there are even better deals out there.
4. See What Other Banks Have to Offer
Consider getting offers from a few other banks. It may be useful to state that you’ll move your banking over if you get a competitive business line.
5. Consider Your Options
With offers in hand consider which is the best line is for you. If the credit limit is low but the interest rate is also low and you don’t need a lot of credit, such an offer may work. If you need a higher credit limit, but the offer has a higher interest rate, the need for capital may be more important than the interest rate. Having several offers in hand allows for such choices.
Learn More About Business Lines of Credit
Our book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.
Fill out the form on this page and we will let you know when the new book is released and offer early bird discounts. Plus you’ll get a free guide today – The Levels of Business Credit. (And don’t worry: we know you’re busy so we won’t flood you with email.)
About the Authors
Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.
Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.