The Importance of Having a Line of Credit

As a business owner, there is nothing that will keep you up at night more than worrying about having enough money to keep your business going. Especially if you are in a seasonal business, there are going to be times when your cash flow isn’t where it needs to be, and you need to have a backup plan in place. Additionally, it’s nice to have some extra cash laying around in case you need to make some investments in your business. Many business owners though don’t think about opening up a line of credit with their bank until they actually need the money, which is usually too late. Here are some tips to keep in mind when it comes to getting a line of credit, and what to do with one once you have it:

Tip #1 – Build a Relationship with Your Banker Now

There’s nothing worse than having a cash flow issue and not being able to get a line of credit because you don’t have a relationship established with a good business banker. There are a couple of key relationships that you need to foster the minute you open your business, and a good banker is one of them. The best time to do this is right when you start your business. By meeting with a banker right from the start, you can share your business plan with them, and then check in with them on a regular basis to let them know how things are going. Over time, the bank will see that you are progressing, and also see that you stick with your plan and get results. This will make it much easier when you need assistance, as you’ll have built up trust from the start.

Tip #2 – Get a Line of Credit When You Don’t Need One

The best thing to do is to get a line of credit as soon as you can, even if you don’t need one. This way, you can use the line and pay it back right away, to establish a track record with the bank. This will establish trust with your banker. Additionally, you can get banks to compete for your business, and get better terms. Keep in mind that in order to get a line of credit, most banks will look for a couple of things:

• They want to know that your business isn’t just a hobby, so they want you to have been in business for at least a couple of years
• They want to see that you have a positive net worth, and that your business is profitable
• They will want to see your business plan
• You’ll need to have tax returns as well as audited P&L, balance sheets, and cash flow statements for at least the last couple of years that you have been in business
• They will want to see your projections for the upcoming year
• They may want some additional collateral to ensure that their risk is low in case your business takes a down turn

So, make sure that you are prepared and have your financials in order before you need to.

Tip #3 – Partner with a Smaller, Local Bank

Small local banks rely on local, community businesses to keep them going, whereas the larger national chains not only don’t need your business, oftentimes they prefer to deal with much larger businesses. Larger businesses require larger loans and are usually a little less risky for larger banks. Small banks need your business, so they are usually more open to working with you.

It’s good practice to find some of the larger banks that you don’t want to do business with, and pitch them first. This will give you the opportunity to understand what their questions and objections will be, so that you can fine tune your presentation. Then, when you get in front of the bank that you a really want to partner with, you will be buttoned up and prepared.

Keep these three tips in mind when you are searching for a line of credit, and make sure you get your line of credit before you need it. You’ll be glad that you did!