How Do Banks Consider Giving Lines Of Credit?

A bank line of credit is an excellent way for a business to be sure that financing is available when needed. A line of credit allows you to withdraw funds from the credit line anytime and they offer flexible payment terms. Usually the terms offered are significantly lower rates than credit cards. It is important to know what most banks consider before approving these types of credit lines.

Basic Application Considerations

When your small business applies for a business line of credit, the bank will consider many factors and variables when deciding whether or not to approve your application. Usually, banks will first look at your business and how long it has been in operation and also check to see if your business has an established business credit rating. If your business is relatively, a bank may still approve your small business for a line of credit; however, the bank will generally require much more from you as the business owner.

Lines of Credit for New Businesses

Most banks will require collateral to secure the business line of credit. Generally speaking, acceptable collateral may be in the form of real property or commercial business equipment that can easily be sold and converted to cash.

Also, most banks will require new business lines of credit to be guaranteed by the owner. The bank will probably require that you offer a personal guarantee for the line of credit and will also use your personal credit history and rating to help determine if your small business is eligible for qualified for the line of credit. The bank will run your personal credit history and may also ask for personal tax returns and bank statements. Also, many banks require a funds and payment proposal to explain how the funds will be initially used, as well as explain how the line of credit would help your business become more profitable.

Lines of Credit for Established Businesses

If your small business is relatively well established and has been in business for a number of years, most banks will generally be more lenient with collateral and personal guarantee requirements. You may not have to offer real property or business equipment to secure the loan and will not have to personally guarantee the line. You will be required to demonstrate that your small business maintains a good business credit rating and is profitable.

However, even with established businesses, you will always be required to submit various forms of various types of financial information to the bank. For example, the bank will probably require that you submit business tax returns and financial statements, such as profit and loss statements, or cash flow projections.

In addition, if your business is involved in certain types of industries that the bank may consider somewhat risky, the bank may still require that you provide personal income tax returns in order to help show that the businesses is making a profit and that the earnings generated are sufficient to maintain your lifestyle.