How to Negotiate a Line of Credit

Coard says the basics consist of three years’ of  business tax returns and the business owner’s personal tax returns; three years’ of financial statements, including balance sheets (listing the company’s assets and liabilities); and income statements (listing revenues minus expenses to determine profit or loss). Some lenders will also request a statement of cash flow (charting movement of funds in and out).

What can business owners do to improve their chances? “Present a logical business plan that demonstrates their ability to repay the obligation,” says Hilson. “Maintain good financial controls, and don’t try to completely kill profits to manage taxes. Banks can’t lend on cash flows that don’t get formally reported.”

Here are five key areas loan officers will examine before granting you a line of credit.

How will a credit line help your business?

Lenders look at how the funds will be used, says Hilson. The most common uses include funding inventory, accounts receivable, and capital equipment. They’ll also look at what the business does—who does it sell to and buy from—as well as ask general questions about the company’s business model.

What are your annual net revenues?

You must prove that the business has lasting earning power, which means you’re generating net income. Yearlong monthly cash-flow statements will reflect this net income. Lenders like to see enough ongoing cash flow to cover all expenses, including the proposed loan payments, says Hilson. A seasonal lull can be reconciled, but a drastic drop in revenues year after year would cause concern.

How far out are your receivables?

Typically, a credit line is secured with accounts receivables. “We want to see current, detailed accounts receivable aging—a report listing accounts receivable owed from each of the company’s customers that indicate the number of days outstanding categorized as current, more than 30 days, 60 days, and 90 days,” says Coard. Based on eligible collateral, this report is often used to determine the limit of the line of credit. She says that most financial institutions will not include accounts receivable that are more than 90 days past due when determining the line of credit. In addition, if the company’s accounts receivable include what’s known as a concentration, meaning more than 20% of the total accounts receivable balance is due from one customer, the amount of the concentration may either be discounted or excluded from the eligible accounts receivable.

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