During a period of profitable growth, a cash squeeze is a common occurrence. Money is spent quickly when the high growth requires more work and more frequent costs. A line of credit is designed to support and bridge the gap, but getting one is not always straight-forward. There are a few things you should know about getting a line of credit: the time it takes, security and covenants, and document preparation.
Usually, it takes 4 to 8 weeks for lenders to underwrite business lines. However, it has taken up to 4 months. It is strongly recommended to begin the process as soon as you foresee a period of high growth.
Personal guarantees and covenants with the bank or other lenders are required. An example of a common covenant is the Balance Sheet or AQR Covenant. The AQR Covenant requires a Current Assets to Current Liabilities ratio of at least 1.35. You will also want to provide projected, historical and personal financial statements. Other things to include with the lender's funding application include business and personal tax return, debt schedule, accounts receivable and accounts payable.
If you are expecting a significant growth in your company, lenders are an important factor to consider. Don’t get squeezed by a gap. Plan ahead instead.