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 at least two to three years is required. Other requirements usually include a 650 or higher credit bureau score, full financials and certain industry type requirements. Full financials include 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 for the borrower and does not have a limited term. Lenders consider this long term exposure to be high risk for them 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 may be declined for a business line of credit.
My business line of credit can be called by the lender and require me to pay it off immediately at any time and also has an annual $0 payout requirement. Is that legal?
An annual payout provision and the ability of the lender to call the loan and require payoff at anytime is legal and also enforceable when it is written into the contract. These provisions are very risky for borrowers. Lenders sometimes call loans because they decide to lower their risk models or their institution is being acquired by another lender. They may call loans even if the borrower has a perfect payment history. Borrowers do not know in advance their loan is going to be called and often cannot pay it off immediately. If the business cannot pay off a loan that has been called, their credit and collateral is in immediate risk. Their business can fail because lenders can seize their accounts receivables, real estate or any other collateral attached to the loan.
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 of looking for other financing first. Attempt to negotiate the terms of the approval with the lender when your business cannot get financing without using a home as collateral.