Small Business

Applying for a business line of credit: 5 tips to know before you apply

Growing your business can be hard — very hard, in fact. When you’re just starting out as a business owner, cash can be hard to come by and bootstrapping might negatively impact your business’ ability to grow and your standard of living alike. A small business line of credit can help. A few common examples of business line of credit uses include:

  • Investing in new technology to increase your output capacity
  • Bulking up on inventory to lower your overall cost of production
  • Hiring additional employees to keep your customer service top-notch
  • Opening a second brick-and-mortar location
  • Boosting working capital during peak seasons
  • Refinancing high-interest debt from business credit cards

You’ll need to come prepared when applying for a business line of credit and ensure you meet all of the requirements. Listed below are five tips for ensuring you can get the help you need to take off at full speed:

When applying for a business line of credit, write a business plan then get feedback

Business plans show lenders your vision, help them understand how money will be used, and explain to them how you intend to repay the loan later. Some entrepreneurs struggle to reach out to others for feedback on their business plan — it’s okay to be nervous. Family and friends can provide support through feedback, essentially pre-screening your hard work.

Once you’ve had a few close contacts review the plan, reach out to a professional for a brief review. They may be able to highlight other spots for improvement and build up your confidence before meeting the lender. Strong business plans can go a long way when you’re applying for a small business line of credit.

To collateralize or not to collateralize?

Expect different types of business line of credit repayment terms — some may require you to put up your business assets to ensure loan repayment, while others only ask for a personal guarantee. Personal guarantees essentially say that you’re accepting personal responsibility for the loan if your business is too slow and you default on the loan.

A collateralized small business line of credit may have better interest rates because you have more ‘skin in the game’ than if your assets weren’t on the line. There is a strong correlation between individuals’ attachment to things they have put effort into — such as procuring and purchasing business assets — especially if the business started out as a bootstrapped project.

How to leverage ‘soft pulls’ when getting a small business line of credit

When someone like a car dealer or bank needs to see what your financial history looks like, they can check without giving a ‘ding’ to your credit score. Hard inquiries — information requests from the major credit bureaus — drop your score by a few points. Business owners can apply for a ‘score freeze’ if they will have multiple hard inquiries in a short period of time.

An alternative method of obtaining a very close estimate when applying for a business line of credit is called a ‘soft pull’ or ‘soft inquiry’. When soft pulls are carried out, public information is collected, leading to a score which is close, though may be a few points off. Lenders generally use soft pulls in the early stage of lending to calculate your risk. If everything looks reasonable, they will conduct a hard inquiry immediately before offering or closing the deal.

As a consumer, you can perform the same soft pulls to see where your credit stands and ensure you meet the business line of credit requirements. Performing soft pulls and working to adjust your credit in advance not only makes your score look better; it shows that you can set goals and manage your responsibilities — qualities every lender looks for.

Know which documents to bring

Lenders need information to determine their level of risk when giving you money. To get the information they need, lenders commonly request:

  • balance sheets
  • cash flow analysis
  • personal financial records
  • three years of tax returns (personal and business)
  • profit-and-loss statements.

Without business cash flow data, lenders may request your personal tax returns, perform a soft pull on your credit, and delve deeper into your financial past. Lenders will see if you have any outstanding collections, liens, or other financial red flags in your history that may impact your small business line of credit application. Information along these lines is generally public knowledge, so lenders can perform a soft pull to check up on you without negatively impacting your credit score.

Having a strong business or personal credit score can readily lead to more favorable business line of credit repayment terms.

Your personal credit history might work in place of business history

Lenders prefer to see at least two or three years of history when applicants seek a small business line of credit. If a business has not been around long enough to satisfy these conditions, personal credit history can be used to determine creditworthiness.

Personal credit included, lenders will likely review the following information to determine whether or not they are willing to lend to your business:

  • Credentials: What’s your industry experience, education, and actual experience opening/running a business (even if it’s not in the industry of your current project)?
  • Personal and business credit history: How you manage your personal credit is highly useful data for all types of lenders in evaluating your small business line of credit application. For many individuals without a business credit history, personal credit history may be the only data available.
  • Assets: Having assets, such as equipment and accounts receivables, enables you to access certain types of debt financing.

Once all of the pieces come together:

  • You’ve planned out uses for your business line of credit
  • You’ve determined a preference for collateralization (or not)
  • You’ve worked to correct any blemishes on your personal and business credit
  • Your documents are aggregated
  • Your personal credit history is available for backup, just in case

Applying for a small business line of credit can empower business owners to secure the people, products, and production equipment they need for a successful venture. Business owners often move at a breakneck pace that banks can’t match, so other businesses have become lenders to help fill this void.

You’ve started down this path, let us help you succeed! Check your eligibility today for a small business loan with Funding Circle.

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