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What documents are required for a business line of credit?

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Over the next year, inflation could have a significant impact on the operations of many small businesses, leaving approximately 50% in need of credit to stay afloat, according to PYMNTS.com. Entrepreneurs seeking to grow or expand their businesses can benefit greatly from a business line of credit.

This type of credit offers the same flexibility as a credit card for borrowers who require regular access to funds. Once the borrowed money is repaid, the borrower can access the entire line of credit again if necessary. To expedite the application process, it is advisable to organize your credit documents before applying.

Documents about yourself

When applying for a line of credit, lenders may request to review your personal financial information along with your business finances. This is because small business owners often have their personal and business finances intertwined. To verify your identity, you will need to provide your name, address, and date of birth, which can be confirmed with a government-issued photo ID.

Additionally, it is recommended to provide your resume to support your expertise and creditworthiness, as well as your personal bank statements and tax returns.

While the lender may review your personal credit report, it is recommended that you to obtain a copy as well. This way, you can evaluate whether you meet the creditworthiness criteria.

Documents about your business

When approving a line of credit, lenders will require comprehensive documentation about your business. While some lenders may not ask for all these documents, you should have the following ready:

  • Your business plan
  • Your legal business name and organizing documents, including your Employer ID Number (EIN)
  • Time in business: Lenders usually set a minimum loan term of six months, while traditional lenders typically require a minimum loan term of two years.
  • Business financials, such as business checking account records, profit and loss reports, and tax returns
  • Business liabilities: Provide details on any other credit lines or loans that your business currently has.
  • Provide more information about your industry and how you plan to generate profits.

Other documents

These documents are only relevant to secured loans.

  • Collateral information: Provide documents that pertain to company-owned assets, including equipment, technology, vehicles, real estate, and bank accounts. These assets may be used as collateral for business loans. It may be necessary to provide an appraisal of the asset to demonstrate its value.
  • UCC lien filing, if applicable: This is about the legal document filed under the Uniform Commercial Code, which confirms the lender’s right over your collateral in case you are unable to pay back the loan. The lender will provide this document during the loan closing process, so you don’t have to create it. However, it is important to keep a copy of it and request a lien release once you have paid off the loan.

Documents needed for SBA business lines of credit

SBA CapLines are credit lines that businesses can use to cover short-term expenses and can be revolving or non-revolving. There are multiple types available.

  • Seasonal CAPLine is a type of financing used to adjust to seasonal fluctuations in inventory, accounts receivables, or labor costs.
  • Contract CAPLine covers the expenses of materials and direct labor for contracts.
  • Builders CAPLine is a financing option for small builders that covers the costs of construction or renovation. The project itself is used as collateral for the loan.
  • Working CAPLine is a type of revolving credit line that uses short-term assets to support small business needs, such as extending credit to other small businesses. The repayment process involves converting short-term assets into cash.

To apply for an SBA loan, you must provide several documents with your application, including SBA Form 1920, SBA Form 1919 (with borrower’s personal information), SBA Form 413 (with borrower’s personal finance statement), profit and loss statement with schedules from the previous three fiscal years, and projected financial statements.

In addition, ensure that you provide a list of your affiliates and subsidiaries, including their names and addresses, as well as a document that includes your company details such as history, challenges, and the reason for your funding request. Provide any information about previous business loans you have applied for. If you are purchasing an existing business, please provide proof of equity.

The bottom line

To expand your business in a responsible manner, it’s important to select a suitable business line of credit that fits your specific requirements. If you borrow a significant amount or apply with a particular lender, you might need to provide additional documentation. Online lenders typically require less documentation than credit unions and banks. It’s recommended to keep both physical and digital copies of these documents accessible to simplify the application process.

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