Business Line of Credit

[bclay]

My husband and I are in the process of trying to get a line of credit for our business. We have cash flowed for five years and it is now time to work on a line of credit.  We have met with a couple of Banks recenlty who have had plenty of questions for us, .  I am wondering what questions should we be asking them?  We don't want to seem desperate we want them to want our business?  Any advice??

[Anonymous]

I would ask if they maintain their own portfolio, and if they plan to continue to do so. Back in 2001 I setup a $25K LOC through Microsoft Capital. The terms were 7.9% APR, and 5% minimum payment. In 2005 they sold the portfolio, and the terms jumped to 19.9% and 10% minimum payment. Caught me completely off guard and resulted in a rapid decline in my credit because I couldn't keep up.

[redpat]

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@bclay wrote:

My husband and I are in the process of trying to get a line of credit for our business. We have cash flowed for five years and it is now time to work on a line of credit.  We have met with a couple of Banks recenlty who have had plenty of questions for us, .  I am wondering what questions should we be asking them?  We don't want to seem desperate we want them to want our business?  Any advice??

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Please call your accountant and see if he has any recommendation.  Commercial lending is relationship based and if you have good credit a bank in your area should be able to help.  Rates should be no more than 1% over prime.  

[bclay]

Hi @redpat.  We did contact our CPA and he gave us two smaller banks to contact.  We have recieved one proposal back with a rate of prime +2% (variable) on $100,000 loc.  The maturity is 1 year and then they decided if they want to extend credit the following year, if not the note becomes due immediateley.  So we have to treat it very carefully.  I assuming the other bank will have the same propasal.  I am just not sure what bank to go with? 

[redpat]

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@bclay wrote:

@Anonymous @redpat.  We did contact our CPA and he gave us two smaller banks to contact.  We have recieved one proposal back with a rate of prime +2% (variable) on $100,000 loc.  The maturity is 1 year and then they decided if they want to extend credit the following year, if not the note becomes due immediateley.  So we have to treat it very carefully.  I assuming the other bank will have the same propasal.  I am just not sure what bank to go with? 

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Credit lines are renewed annually.  Usually if you re in good standing and use your line the way it should be used, i.e. not buying fixed assets and is 0 for a 30 day period you shouldn't have a problem on renewal.  If the line is maxed out near the renewal date then they may require you to term-out the loan, this is condsidered "evergreen".

I would wait until you have the other banks proposal and then you can negotiate between the two of them.  Rates can be negotiated and I would suggest on 1% over prime and see what they come back at, I'm estimating you may get 1.25% - 1.50%.

[Anonymous]

It's a fairly simple process.

We have also had our business for five years and have decided to expand the business.  We applied for a business LOC with the bank that we do our business and personal banking with and were approved a few days later.  We were required to submit business and personal tax returns for two years and a year to date P&L along with the application and a personal financial statement.  As others have mentioned the LOC is renewed annually.  It can also receive automatic increases in the credit line on an annual basis or we can request a credit line increase.  It's at a fixed rate of 5.39% and is billed interest only on the first of the month.  Principle payments can be made at any time.