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Giving yourself a buffer thanks to a line of credit

December 09, 2023

Do you sometimes worry that you won’t have enough cash to finance your business’s current operations? Maybe you should consider applying for an operating line of credit from a financial institution.

This line of credit will provide you with the funds needed while you’re waiting for payment of your accounts receivable. In general, this loan is mainly secured by accounts receivable, and by inventories and any other assets the lender may deem necessary.

The maximum amount you can borrow is reassessed periodically, usually every month, based on the value of these guarantees and your financial statements. This amount can therefore vary significantly, but can never exceed the pre-established limit of your line of credit. This limit is negotiated when you apply for the line of credit and is reviewed every year thereafter in connection with an overall review of your file.

How much and under what conditions?
How much of a loan can you get? This will depend on your financial needs, the level of risk you represent in the eyes of the bank and the guarantees you can provide.

When analyzing your risk, the banker will examine four main areas:
• Your business’s financial situation;
• Its management quality;
• Its industry;
• Environmental issues.

The higher the risk, the greater the additional guarantees required, such as personal guarantees and certain assets (real estate, equipment, etc.).

The level of risk will also have an impact on the interest rate and terms and conditions (that is, the financial ratios to be respected) applicable to the line of credit that you can negotiate with your banker.

To ensure that you are a reliable borrower, the banker will examine your credit report. You should check your credit report regularly to ensure that everything is in order; you can do this through agencies such as Equifax Canada or TransUnion Canada (for more information about this, click here).

Be well prepared
In 2016, 25% of Canadian small businesses applied for debt financing (line of credit, loans, etc.) and 82% of them received it according to Innovation, Science and Economic Development Canada. This means that you have excellent chances of obtaining a line of credit, as long as you instill confidence in the banker and you have a solid financial footing.

It is essential to carefully prepare your request. Here are a few key steps for the process:
• Summarize your project for your account manager and ask questions about the procedure to follow, the documents needed, etc.
• Your account manager may want to meet with you a few times to gather further information.
• Sometimes he/she may want to visit your business to get to know it better and see how it’s operating.
• Make sure you establish a good relationship with your account manager, who should be considered like a business partner. The account manager will represent you before the various bank bodies and will promote your file.

Would you like more information about this topic? Feel free to contact our experts who will be pleased to help you.