Every one to two years businesses are required to renew their line of credit. And while this shouldn’t be a surprise to any business owners out there, there are ways to ensure an even smoother, more efficient renewal process.
Here’s what you need to know about the renewal process and how to ensure a smooth process along the way.
Line of credit vs a term loan
A line of credit is a revolving loan that gives businesses access to only interest payments, monthly. What makes a line of credit different from a term loan is that a loan has a fixed schedule of payments until the loan is paid off. With a line of credit, there are no payments until you use your credit line which allows your business to borrow any part of it once you have repaid it.
The renewal process
As a business owner, you should know when your line of credit is going to be due, so it’s not a surprise. You should be proactively communicating with your banker, who may either send out a paper or electronic notification letting you know that your line of credit is due for renewal along with a list of information they need in order to renew. This often depends on the type of line of credit it is. For instance, if it’s an asset-based revolving line of credit (RLOC), your bank may ask for information on the inventory, your accounts receivable, fiscal year end financial statement, current financial statement, and 12-month forecast.
Asset-based RLOC require an audit. Your financial institution will send an auditor out to your site (generally a third party) and they will be the one to request this information from you. They will also come onsite and then send a report to the bank stating if the line of credit is still good. Make sure you get a copy of this report. After all, you paid for it.
5 statements that may be required during your credit renewal process
Not submitting the correct documentation can delay or get your line of credit revoked, or worst case your financial institution can demand full payment on the line due to a violation of the agreement. Here are 5 types of statements that may be required during your line of credit renewal:
- Annual financial statements, current interim financial statement, AR and AP agings
- Tax returns (business and personal)
- A personal financial statement from the guarantor (typically the owner greater than 20%)
- Financial projections for the next 1-2 years, including balance sheet and monthly cash flow
- Loan covenants per the loan agreement which show the financial health of your business
Eliminating frustration for both you and your financial institution
Financial institutions typically take 90 days in advance to start the renewal process.
Eliminate the frustration for both you and your financial institution by making sure your financial statements are accurate, current, and complete. Depending on how smoothly the AR audit goes, the auditor may not see any reason to change the terms on the line of credit, which means you could be good to go until the next year unless you hear otherwise.
Renewing your business’ line of credit allows your bank to make sure that type of credit is still the best fit for your business. Have there been any changes to your business? Depending on how big of a change there has been to your business, you should notify your financial institution. For instance, a business with an AR loan can take out their line of credit up to up to 80% percent of their AR. The bank primarily cares only whether the accounts receivable is legitimate in the event they need to collect on that loan. The bank’s goal is to ensure they can collect on all of the money they are owed.
There are a lot of things that go into your line of credit that you need to submit including monthly statements and compliance certificates. The right experts can help facilitate a smooth and efficient renewal process by not only cleaning up but better organizing your finances. If you need assistance during the renewal process, are looking to increase your line of credit, or have any questions regarding your financial statements, contact us today.