How to Start a Corporate Line of Credit
Many business owners establish corporate lines of credit at banks and credit unions. To qualify for a line, both the owner or guarantor and the business entity must have good credit and a positive cash flow. Typically, corporate lines of credit have variable rates that are based on either the U.S. prime rate or the London Interbank Offered Rate. Some lines are set up for a specified term that lasts 10 or 20 years, but many are renewable annually.
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Instructions
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Review your accounts and balance sheets to determine how much money you need to borrow. If you plan to use the line seasonally to buy inventory, take possible price increases into account when projecting your costs for upcoming years. Speak to the other owners of the corporation. Those with a 20 percent ownership share in the company must sign the loan documents as a guarantor, meaning they accept responsibility for paying the loan if the firm fails to do so. You cannot apply for the loan if one of the owners refuses to guarantee it.
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Contact your bank. Business underwriters take into account existing relationships when approving and pricing lines of credit. Find out what terms your bank can offer, because some banks have more restrictive terms for lines of credit than others. If your bank does not have a credit product to meet your need, contact other local lenders to find the best deal. To get a lower rate, consider using your business premises or equipment as collateral for the line of credit. If you do not have collateral, you can apply for an unsecured line of credit.
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Go to the bank offering the best terms, and give the business loan officer the business's tax returns for the previous two years. Each 20 percent owner must provide two years of personal tax returns and a personal financial statement listing assets and liabilities. Each owner must also give the banker a Social Security number, date of birth, ID and physical address. You must furnish the banker with the business's address, phone number, tax identification number, cash flow analysis and a copy of the articles of incorporation.
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Sign a corporate line of credit application form provided by the banker. Each owner must sign as a guarantor, and one person must sign on behalf of the business entity as the authorized signer. After taking the application, the financial institution will underwrite the loan, and the approval process normally takes at least a few days. Once the loan is approved by underwriting, the business banker will let you know the rate and line limit.
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Schedule a loan closing. Every guarantor must attend the loan closing and sign the line of credit agreement. Unsecured lines of credit normally become available for use the day after the loan closing. In some states, lines of credit tied to collateral become available for use after a delay of a few days, during which time the bank officially attaches the lien.
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Tips & Warnings
If a loan guarantor leaves the business, you should close the loan. You cannot remove a guarantor and leave a line open, and if you leave a former company owner on the line, the person can still legally access funds.
