A line of credit is probably the first source of financing a business seeks to acquire. It’s often the easiest way to secure money and manage cash flow. Since a line of credit isn’t a one-time amount of money like a loan, a line of credit provides business owners with more flexibility in maintaining cash flow.
In a perfect scenario, a business’ banking institution can even provide the line of credit. But as so many companies are discovering, it isn’t always that simple. If you don’t perfectly meet the specific set of criterion established by the bank, you may find yourself being denied and wondering why.
While many factors play into a bank’s decision to deny your line of credit, here are a few of the most common:
- Creditworthiness. This is based off your credit score, which is a detailed account of every dollar you borrow, where it came from, and the timeliness of your repayment. Lenders want to know you will repay what they give you.
- Debt-to-equity ratio. If you’ve already borrowed a lot of money against your worth, your chances of being approved for additional financing decreases.
- History. A bank will look to see what kind of financial history your business has. If you’ve just recently opened a checking account and have not yet established any credit products for your business, they may deny you. Also, repeated overdrafts and late credit payments will also work against you.
- Profitability and risk. The institution lending you money is going to be concerned with your ability to repay them, and may base their decision in part on past profitability of your business and the risk surrounding your specific business industry.
Being refused the money you need to continue conducting your business is incredibly discouraging. If you’ve experienced this and one or more of these factors describe why your bank turned down your business for a line of credit, you aren’t out of options. There are alternative business financing solutions that can not only get you the cash you need, but also help your business start rebuilding a positive credit score.