In most cases, a business line of credit is the most difficult type of financing to get. Business owners should look at the terms. This includes interest rates, number of months, total amount of the repay, and early payoff considerations.
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FAQ Frequently asked questions on how to get a business line of credit
How can I get a business line of credit?
Time in business of two to three years is often required. Other requirements include a 680 or higher credit bureau score, full financials and industry requirements. Full financials means 3 years business and personal tax returns, a personal financial statement and interim financials. Interim financials are a year to date profit and loss statement and balance sheet.
Why are business lines of credit so difficult to get?
A business line of credit is hard to get because it is set up to be available indefinitely to the borrower and does not have a limited term. Lenders consider this long term exposure to be high risk and require a longer history of business success with increasing gross and net income. If the business shows low net income and flat revenues, they are unlikely to be approved for a business line of credit.
Can my lender require me to suddenly payoff my business line of credit?
An annual payout provision and the lender being able to call the loan and require payoff at anytime is legal and enforceable when it is written into the contract. These provisions are extremely risky for borrowers. Lenders sometimes call loans because they decide to lower their risk models, or when they are being acquired by another lender. They may call loans even if the borrower has a clean payment history. Borrowers do not know in advance their loan is going to be called and often cannot pay it off immediately. Their business could fail because lenders may be able to seize their accounts receivables, real estate or any other collateral attached to the line of credit.
Some lenders put conditions on a line of credit that negates all of the other advantages of the financing. Lenders may require the borrower to put up their home as collateral. Borrowers should realize this becomes a home equity line of credit. Borrowers are then giving their home and business assets as collateral. Why not not consider a home equity line of credit then?
Borrowers may be better off looking for other financing first. Attempt to negotiate the terms of the approval with the lender when your business is using real estate as collateral.