How Do I Qualify for a Line of Credit?
Based on our last blog post, we now know that a line of credit is to be used to assist your company with short term cash flow requirements and that it is a good idea to arrange for it before you need it. Now the question is how do you qualify for it?
When banks loan money, they look for two types of repayment paths. The first source of repayment is based on the profitability of your business and it will be up to you to be able to prove to the bank that the cash flow from your company is sufficient enough to repay any advances you take from the line of credit. This is usually done by providing the bank with your business plan, tax returns, financial statements and personal statement of net worth (or any combination of these documents). Along with this information, you should also provide the bank with a one page executive summary stating why you need the line, how much you need and how you are planning on using the funds.
The second source of repayment that a bank will require is some type of security interest in a hard asset that they can quickly foreclose on should you not meet the repayment terms required by the line of credit debt covenants. Usually the most common type of collateral is either a trust deed on real estate that you own or having another individual with substantial assets “co–guarantee” the loan (such as a family member).
The rate of interest to be charged on the line as well as the bank fees charged annually to originate and maintain the line of credit will vary. The factors affecting the variance depend on the institution, the quality of the credit request in terms of your financial resources, and the overall relationship that you have with the bank. It is not uncommon for these annual fees to approximate 1% of the available credit that is granted.
Our next blog post will address the issue of how to choose a bank that is right for your business.
Russ Wertz – Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.