As a small business, you know that your finances can be uneven. Accounts receivable have to be chased down for months. Inventory orders dry up the cash flow you need for payroll. Then all the A/R shows up at once and you’ve created the next big product, just to start the cycle over again. One solution to the boom/bust cycle is opening a small business line of credit. Lines of credit act as a revolving charge card, with a lending limit, allowing you to repay over time and only charging interest on the outstanding balance. If your business could benefit from a line of credit, read on for information on the requirements you’ll need to meet.

Collateral

Lines of credit depend on the collateral businesses control. Often a bank will ask you to offer all of your business assets against your credit line. Depending on how long you’ve been in business, they may also ask you to pledge your personal assets, like your home and car. Generally, however, you’ll be using your real estate, machinery, accounts receivable and inventory. While this may sound scary, think of it as a home mortgage. Your home is your collateral for the loan, meaning if you fail to pay the mortgage you lose the home, yet this is how millions of people finance homeownership every year.

Business Age

Banks want you to succeed and be able to pay your loan back, so they need some sort of track record on which to judge your potential. Your business should be open a minimum of two years before you’re eligible for a line of credit. The longer your track record and the more successful your business, the better loan terms you can expect.

While newer businesses can get lines of credit, this is when your personal credit and personal assets will come into play. Even securing the loan with personal assets, you won’t receive the best rates. 

Revenue and Profit

Any time you apply for a loan your financials come under scrutiny and lines of credit are no exceptions. Just as you have to prove you have the income to repay a credit card bill, the bank wants to see that you are bringing in enough money to pay towards your outstanding line of credit. Besides revenue, you’ll need to show that your company is also profitable. 

A line of credit shouldn’t be the answer to business financial woes but another tool in your arsenal for maintaining cash flow to an already successful business.