Lines of Credit are typically used to finance cash flow issues in the business, such as waiting on receivables to be paid, purchasing inventory, or managing seasonal costs. In some cases they may also serve as backup or overdraft accounts to help cover large “bursts” in spending that the cash in your account may not cover.
Do I need to Sign Personally?
Unlike a traditional bank loan that is used to cover hard assets such as a building or equipment, Lines of Credit are often setup with your business and personal credit qualifications in mind. That means it’s highly likely, especially if you’re a newer business (within four years of founding) that you’ll be asked to sign for the LOC personally.
Since the Line of Credit isn’t being used for a specific collateral item (like a building or equipment), the bank doesn’t have any recourse to recover the amount of credit in the event that the business cannot repay the amount. That leaves just one other source – you. In the case of a partnership with multiple owners, the bank will almost certainly ask all partners to sign for the note, taking into account all of their personal credit situations.
How much is Available?
Most business owners can qualify for up to $100,000 of credit using traditional underwriting methods, which simply means you can use your bank’s typical application process. Again, the qualifications still need to consider both the business’s ability to repay the note as well as your own personal ability.
What types of Documentation will I need?
There are a number of documents the bank’s underwriters will ask for. You’ll need to prove the identity of the business, which will include your Articles of Organization, Employer Identification Number (EIN), and any relevant State business licenses that you may have.
Beyond that a business bank account is needed, preferably held by the same institution that you’re applying to, although certainly not required.
Will my Credit by a Factor?
Yes, your credit will certainly be a factor, for not only your personal credit (such as your Equifax, Experian, or TransUnion score) but your business credit which is typically associated with your Dun & Bradstreet score. In the case of a partnership, the credit scores of each partner will be considered. Generally the bank is looking for personal credit scores greater than 680.
The bank is looking to understand your ability to repay your debts, so showing that you have a good history of both personal repayment and business repayment will make their job a lot easier, and along the way, much easier for you to qualify for a Line of Credit.
Summary
Establishing a Line of Credit makes sense for just about any business. It’s better to have a Line of Credit and not need one than need a Line of Credit and not have one! Even a small LOC that you use infrequently is a good idea to start building your business credit which you may need to grow upon later.End