What Businesses Need to Earn a Line of Credit

It’s no secret that businesses need money to operate. However, it’s not always possible to have the money on hand, especially if the business is going through a slow period. When this happens, it can be helpful for businesses to have established lines of credit to help them to get the supplies or inventory they need, even when they can’t pay for it all at once. Of course, lenders are going to give anything away for free. Here’s what a business might need to get a line of credit.

Equatable Collateral

What a business needs to earn a line of credit will vary between lending institutions. However, collateral is a common requirement; the newer the business is, the more likely the lending institution will ask for collateral.

As with other loans, the collateral will need to be roughly the same value (or higher) as the total loan amount. (Yes, lines of credit are technically a type of loan.) Different lending institutions will accept different items for collateral. Common items accepted include machinery, equipment, vehicles, and owned property.

A Good Credit Score

Both businesses and individuals can have a credit score. Either of these scores can be used when applying for a line of credit. Lending institutions will look at both of these scores to determine whether a business will qualify for a line of credit. Generally, the newer the business is, the more the business owner’s credit score will matter. The more established the business is, the more the business credit score will matter.

Just like with personal credit scores, a business can raise its credit score by paying off previous loans and avoiding having outstanding debts. A business’s general financial history will also play into its credit score. A lending institution will likely want to see proof of business accounting records, ranging as far as a year or two back. This helps the lending intuition if the business is likely to be able to pay off the line of credit in a reasonable amount of time.

The higher the credit score is, the more likely a business will be to get lines of credit. Also, businesses with good credit scores are more likely to get better loan terms and lower interest rates.

Using a line of credit is a great loan option when a business owner knows the business will be able to make up the funds quickly. These loans are usually short-term. This also implies that less interest will build up as the loan is being repaid. Make sure to look into this option the next time your business needs some extra cash.