Determining Your Business Line Of Credit Limit

A business line of credit limit, similar to any loan limit, will depend on the financial solvency of the business applying. You can establish your solvency through good business credit, a high total of assets and low liabilities. To determine the credit line available to your business, consider your record in these three areas.

Developing Good Business Credit

An incorporated business will have a credit score, just as an individual does. To get started in developing good business credit, you must assure the business is legally incorporated and registered at the business address. Lenders, bankers and other vendors can report a business's positive financial activity only if the business exists officially. Once a business is legally incorporated, it should follow the same simple rules to obtaining good credit as any individual:

  • Start a credit record as soon as possible--Lenders want to see your credit has been developed over multiple loans and across many years. A new business with no history of taking or paying loans will not qualify for high limits.
  • Make payments on time--Missing a payment by even 30 days can result in a red flag on a credit report and a drop in a credit score.
  • Pay loans on time--Successfully paying off a loan in full is the fastest way to build credit. However, this applies only if the loan is paid on the due date.
  • Balance assets and liabilities--If a business owes more money than it is worth, the business is at risk of bankruptcy. More about assets and liabilities in discussed in the paragraphs below.

Strengthening Business Assets

A new business must build assets quickly to be in a financial position to take on a line of credit. Assets include all items that could be sold for cash, such as equipment, machinery and business supplies. If you do not have valuable physical assets, consider building your fiscal assets to overcome this issue. You can provide a greater sense of stability on your credit application if your business has a lot of cash from investors. Even though this may technically be a debt in your mind, investor funds still appear on the asset side of a balance sheet. Seeking investor funds early in the business's life cycle will help qualify the business for better treatment from banks and future investors.

Lowering Business Liabilities

All debts are considered liabilities on an asset sheet. This includes property that is placed as collateral on a debt in many cases. Therefore, your business assets that are under liens for other loans may not help build your asset base on a credit application. To reduce your business liabilities, pay off your debts and remove liens from your assets before applying for a new loan. If you have another business line of credit, keep the balance below 10 percent. If you have large start-up or expansion loans, assure your assets are large enough to cover these liabilities if you were to go out of business. Your credit limit will not typically exceed your current asset balance.


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