Passing the Test: Get to Know All of the Requirements for Business Lines of Credit
When a business owner needs financing, it’s not uncommon to look into a line of credit. Lines of credit tend to be flexible financing options. They provide businesses with working capital when they need it. If your business is growing quickly or if you have a seasonal business, then you’re probably going to need working capital financing. Here is what you need to know about requirements for a business line of credit.
Many credit lines end up secured by collateral. The company pledges collateral to back its loan in case it cannot repay it. The lender secures it with a UCC lien. This gives them priority to collect if necessary.
Age of Business
The age of your business does come into play. Most lenders want to know that you have been in business for at least two years. This shows that the company has longevity.
Profits and Revenue
In order to qualify, you must have revenue and it has to be profitable. Your profits and revenue should justify the size of the credit line that you require. If your business is unprofitable then you will probably have to provide collateral.
Many business lines of credit require some type of corporate guarantee. This means that the company guarantees repayment. If your company happens to be a subsidiary, then the parent company may have to provide the guarantee.
Lenders will often examine the financial ratios involved with your company. This gives the lender an idea of how your business is performing. The ratios used by lenders may vary across the board. Here are some of the ratios that you may need to comply with:
- Debt to equity
- Debt service coverage
- Current ratio
- Fixed charge coverage ratio
The covenants are the rules that you have to follow in order to keep your credit line active. If you default on a covenant, then you may end up paying extra fees or you could end up losing the line entirely. Most of the time, the covenants are easy to follow. You need to comply with financial ratios, maintain a specific net worth, maintain a certain liquidity, not exceed a particular amount of debt, and repay the debt periodically and advice the lender of any changes.
Business lines of credit can be crucial to the success of a business. It allows you to have the working capital necessary to run your business.