Coard says the basics consist of three yearsâ€™ ofÂ business tax returns and the business ownerâ€™s personal tax returns; three yearsâ€™ of financial statements, including balance sheets (listing the companyâ€™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? â€śPresent a logical business plan that demonstrates their ability to repay the obligation,â€ť says Hilson. â€śMaintain good financial controls, and donâ€™t try to completely kill profits to manage taxes. Banks canâ€™t lend on cash flows that donâ€™t get formally reported.â€ť
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. Theyâ€™ll also look at what the business doesâ€”who does it sell to and buy fromâ€”as well as ask general questions about the companyâ€™s business model.
What are your annual net revenues?
You must prove that the business has lasting earning power, which means youâ€™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. â€śWe want to see current, detailed accounts receivable agingâ€”a report listing accounts receivable owed from each of the companyâ€™s customers that indicate the number of days outstanding categorized as current, more than 30 days, 60 days, and 90 days,â€ť 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 companyâ€™s accounts receivable include whatâ€™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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