Leveraging business credit can help you effortlessly extend your start-up’s growth without requiring you to dilute equity. Utilized at the right time, business credit can empower entrepreneurs to economically finance their sales, marketing and inventory costs while setting the stage for extending their runway and exploring other working capital sources.
However, while banks might be eager to lend you a working capital loan, they often seek a different set of metrics when you apply for a credit facility. For instance, your bank might request you for a detailed cash flow forecast for the next 24 months to accurately earmark the associated risk before approving your loan application.
Thus, in today’s blog post, we will take a deeper dive into the mechanics of business credit and help you navigate the process of applying and getting approved for one.
What is Business Credit?
In layman’s terms, a line of credit for businesses (also known as business credit) is your business’s capacity to borrow from a bank or any other financial institution. In most cases, if your business has been a regular customer of any bank, they will be more likely to offer you a line of credit further down the line.
Most credit lines are flexible – meaning first, you only pay interest on the amount you borrow and not the whole limit. Second, if you consistently repay the borrowed amount, the bank will increase your credit limit, empowering you to leverage future opportunities as well.
How to Get Approved for a Line of Credit?
Now that you are familiar with the mechanics of a line of credit let us explore how you can best structure your application for faster approval.
Step 1 – Cross Check your Business’ Financial Information
The first step to ensure your approval is to cross-check all your financial information. Right from your company’s profit and loss statements to cash flow analysis and balance sheets, every document going back the 12 months and forecast for the next 24 months needs to be readily available.
Having all your business financials well documented will increase both your chances of approval and reduce the bank’s turnaround time as they can perform due diligence faster. Along with this, by analyzing the right documentation, the lender can accurately forecast your growth trajectory for the upcoming months and attest to your repayment capability.
Step 2 – Research your Options
Every lender is different, and thus each of them will have separate preferable business establishments to whom they borrow. For instance, some might borrow to VC-backed start-ups or to those which are not yet profitable, while there may be others which borrow only to profitable companies. Along with this, some lenders might offer borrowers a 3–4-year repayment tenure on the credit line, while others might limit it to 12 months. Thus, it is always advisable that you research your options ahead of time such that you have a higher chance of approval.
Step 3 – Start the Process Early
Lastly, it is always advisable that you start your research and application process with enough time in hand, as lenders sometimes might take long to offer you a decision. In most cases, a 6-month timeline works best for most establishments as it gives you enough time to research lenders and complete each of their application forms. Along with this, most lenders prefer a business having at least a 6-month runway, making this timeline beneficial for both stakeholders.
Information you Will Need to Share
1. While the exact list of documents and business information required for each lender’s due diligence process might differ, the ballpark glossary is as follows.The total amount of credit you are applying for, along with how you will use it and for how long.
2.Detailed profit and loss statements, cash flow analysis and balance sheets, dating back 12 months from the date of application and forecasted for the upcoming 24 months.
3.List of internal key metrics along with those presented at board meetings
An in-depth plan of how you will repay the borrowed amount in the worst-case scenario.
4.If your business is yet to generate profit, you might need to share your investor list, upcoming funding rounds and a timeline for when you expect to become cash positive.
While sharing this financial information, it is crucial to remember that a more detailed presentation will significantly reduce the lender’s due diligence timeline and thus offer you a faster turnaround. Along with this, a detailed glossary outlining your business’s performance will help the lender perform an accurate risk analysis, thereby increasing your chances of approval.
Conclusion – Approach Lenders the Right Way
Every lender has a different approach to accepting borrower applications, and thus, it is better to research your style and tailor it to meet the expectations of both stakeholders. For instance, some lenders might have completely online application processes wherein you need to simply sync your banking system with that of the lender, and their credit scoring engine will take care of the rest.
Likewise, in other instances, the lender might require you to email them your documents for further processing. Along with this, most lenders these days follow a hybrid approach wherein parts of the due diligence occur offline; thus, you need to be prepared for this as well.
To conclude, the application for a business credit line might differ among lenders but following today’s guide will definitely ease the process and increase your chances of approval.
If you are on the lookout for alternative financing, click here to partner with CrediLinq today. At CrediLinq, we are pioneering recurring revenue financing for Asia and are excited to collaborate with promising businesses like yours. Reach out to us today to learn more.
