Three Tips to Securing a Biz Line of Credit that You May Not Know

Amid cautious consumer spending and an overall economic and legislative uncertainty, having a reliable source of credit and short-term financing is a necessity for small business owners. One of the more popular credit options among small businesses has been a bank sponsored business line of credit. But these days, many current small business account holders are seeing their credit lines being slashed or closed down, often with little reason or notice.

So how can a small business owner hope to secure a new business line of credit at the bank? Here are three tips that you may not of thought of:

 

Tip 1: If your credit score is low, consider the option of transferring 100% of the business to your business partner if he or she has a strong personal credit profile. The ownership transfer can be easily arranged and filed in the company’s records. Ownership can be transferred back once you complete the application for a corporate credit line.

Tip 2: Apply for a credit line below $50,000. Loans up to the $50,000 mark are approved much more easily than $100,000 ones, mainly due to the documentation and amount of financials required for the latter. If the credit line you seek exceeds the $50,000 mark, you will have to provide two years of personal tax returns, two years of business tax returns, profit and loss statements and financial statements. So think twice before going for the larger amount.

Tip 3: One of the lessons of the recent credit crunch is not to put all your eggs in one basket. Diversify your business credit and develop relationships with more than one bank. That way, if one bank reduces or cancels your line of credit, you will still have other options.

However, be sure not to open more than three business bank accounts within a 90-day period because the loans might end up stuck in the ratings systems (known as chex systems) which are applied by banks when opening up a business bank account.

5 Tips for Preserving Your Business Line of Credit

Many small businesses rely on a bank-approved business line of credit as a convenient source of short-term financing. But preserving this credit-line is not always so easy. Most banks make a commitment for one year. At the close of the year the business’ financial statements, tax returns, and credit rating are reviewed. If the bank does not like what it sees, then it may not renew the credit-line, and you may be expected to pay the remaining balance in full.

Many business owners may not realize that the bank generally has the authority to “call” the full amount due immediately and without reason.

Suddenly losing a line of credit can be a devastating blow to a small business. Here are 5 tips that can help a business hold on to its credit line even when business performance is poor:

1. Be clear about the bank’s requirements. Make sure to carefully read over your loan agreement so that you know what the banks expects in terms of providing information and repaying the loan.

2. Manage your line of credit carefully. Business lines of credit are meant for small purchases and to provide instant financing to cover a cash shortfall. You should be aware of the amount of money leaving the account, as well as where the expenses are coming from. If you leave balances on your line of credit then make an effort to pay the monthly principle on time.

3. Know when to rest; know when to be active. If your business is going through a difficult patch and you are using your credit-line regularly, then consider “resting” the account every now and then. Resting the account means that you pay the entire balance and refrain from using the credit-line for a short period of time. This shows the bank that you have the ability to cover the account.

On the other hand, if see that your business is not using the account, because you have a positive cash flow, for example, then consider making a few small purchases on it anyway to keep the credit-line active.

4. Keep the lines of communication open. When times are tough, make sure to communicate with your bank about the situation. You will have a greater chance of holding on to the account after you give over your story personally. Where possible, even if business is fine, it is a good idea be in touch with your bank periodically throughout the year. This will help build a relationship that could prove helpful when and if calamity strikes.

5. In an emergency negotiate payment or turn to other financing. If your bank suddenly calls the full amount due, don’t panic. First try to negotiate the repayment of the outstanding balance. These days, there’s a good chance the bank will make it easier for you to pay the amount due. In the meantime, you should look for another line of credit. If you aren’t having any luck or you need the money quickly, then you can try other sources, such as factoring accounts receivables or turning to an asset-based financing arrangement.

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