Often, when business owners need financing, a business line of credit is typically the first place they go. After all, this option provides businesses with the working capital when it’s needed. This funding option is useful if your revenue is seasonal or if your business is growing quickly and you need money for expenses. Additionally, when compared to other alternatives, a credit line is usually more affordable.
Unfortunately, getting a business line of credit isn’t easy. Even those that are backed by the SBA are difficult to get because banks only lend to businesses and owners that have a good credit score, positive cash flow, and collateral.
Business Qualification Requirements for Business Line of Credit
As part of the application process, the bank will examine your business to see if you qualify for a line of credit. They will look at your assets, your past/current revenue, and other items. This is an extensive process that could take several weeks. Here are some of the requirements that are considered when you apply for a business line of credit:
• Time in business
• Financial ratios
Owner/Major Shareholder Requirements for Business Line of Credit
In addition to evaluating the business, most lenders will also evaluate the owners to ensure they are a good credit risk. After all, they are running the company, so it makes sense to look at them too.
There’s another reason that lenders evaluate the owners and major shareholders: they want them to personally guarantee the business line of credit will be kept in good standing, and that they will be personally liable if the business defaults. A few of the factors considered include:
• Professional experience
• Personal credit
• Personal assets
• Background investigation
Can the SBA Help?
The SBA does have several programs to help business owners with financing. The most popular is the 7(a) loan program. One of the most common misconceptions is that the SBA provides the loan/credit line. This is not true. The loans are provided by lending institutions and guaranteed by the SBA.
The role of the SBA is to protect the lender, not the business. The SBA can cover up to 90% of the loan- after the bank has tried to collect from all business and personal guarantors.
Financing Options that are Easier to Get
While a business line of credit is one of the best financing options available, qualifying for one can be difficult. Even with SBA backing, most business owners do not qualify. That being said, two other options are similar to a line of credit but are much easier to obtain:
• Accounts receivable factoring
• Sales ledger financing
If you need financing for your small business, a business line of credit may be one of your best options. However, not everyone will qualify. Certain criteria must be met and most people simply don’t meet them. That being said, if you don’t qualify for a business line of credit, there are other alternatives as well. Contact Aspen Capital Solutions if you need to know more about business lines of credit and other options for business financing.