How to increase a business line of credit
What lenders consider before increasing a line of credit
- How established is the business.
- Borrowers' cash flow, collateral and personal credit history.
- Having a good case for increasing the line of credit.
Companies often establish a line of credit with a lender as a way to keep a flexible flow of cash available.
Unlike a loan, you can borrow against a line of credit and then pay it back several times over. In basic terms, lines of credit are most like credit cards, with a maximum lending limit established by the lender.
Just like with a credit card, lenders sometimes will agree to increase the credit limit on the line.
Understanding lender criteria
Lenders, however, don’t freely hand out lines of credit to businesses, or freely increase the limits. The business typically must be well-established.
Lenders want to see a track record of solid cash flows. Typically, lenders shy away from extending traditional credit lines to startups and want to see more than a solid business plan. They want proof that you can carry the debt with documented real-world transactions. They also often require adequate collateral to back the line of credit. Lenders look closely at your personal credit history, too.
When mulling a request to increase the line, a lender will look again at your financial reports, your collateral and personal credit. On the plus side, a business seeking an increase to the credit limit usually already has an established relationship with a lender.
You usually have to carry a line of credit for six months or more before the lender will increase it. The lender will be able to see how you have managed your current debt over time. If you’ve made your monthly payments on time, and you’ve proven to be a good credit risk, there is a good chance you can get your credit line increased.
It also is often helpful if you have been actively using your line of credit. If you regularly use the line and pay down the balance frequently, it could better the odds that the lender will increase the line.
Requesting a credit increase
Another way to strengthen your argument for more credit is to show strong cash flow. Many times businesses seek an increase in their credit lines when their cash on hand is tight. It is often better, however, to seek an increase from a position of strength, when your business is flush with cash. A lender will typically want to see strong evidence that you can support increased debt.
Another way to convince a lender to increase your borrowing limit is by finding other sources of collateral — such as buildings, equipment or property — that can be used to secure the line of credit. Business lines of credit are often not secured, but lenders may look more favorably on your request for more credit if it is backed by a saleable asset. This property can be seized and sold off by the lender in case you default on your debts.
Another key factor is the borrower’s personal credit history. Lenders look closely at a business owner’s personal credit when considering extending a line of credit. Lenders assume that if you have been responsible with your personal finances, there is a higher probability that those habits will carry over into your business. Lenders also will look at your personal credit if you ask them to increase your business line.
The bottom line is that it won’t be easy to convince a lender to increase your credit limit. It won’t happen unless you have first proven yourself as a responsible borrower and managed your credit line well.