While cash flow is the main focus of banks, collateral is also of primary concern, and banks never lend 100% of the value of any collateral. Typical collateral for Lines of Credit includes qualified trade receivables and inventory. It is important to understand how banks define qualified collateral, and how to calculate its value.
The business owner’s communication with the Banker is probably the most important and yet understated factor that the business owner must focus on – not just when trying to increase a Line of Credit – but all of the time. You need to have an ongoing relationship with your banker, and not just talk to them when you need to borrow money. Another important factor related to communication is providing the banker with documents that are required based on your financing agreements on a timely basis. Sometimes, not providing the information can cause a default on the loan, and it is your responsibility to provide that information and to make the banker’s job as easy as possible. This is a critical function of a CFO.
If you, as a business owner, want to increase your Line of Credit, you need to understand the requirements and why they are in place. Banks want to lend money, but only for the right purposes and only when they are confident that it will be paid back. Having the right documentation in place to prove that you manage your business and your cash flow effectively will show your bank that you are a good candidate for additional credit.