Business Line of Credit: When to Set It Up and How to Size It
Set up a business line of credit when you don’t need it, from closed books, sized to the deepest negative week in your 13-week cash forecast plus a margin. Banks lend to businesses that can show they don’t need the money. Apply in October with a strong year-to-date and a balance sheet that ties, and you get a yes at a decent rate. Apply in December because payroll is Friday and the big customer paid late, and you get a slow no, or a fast yes from a lender you’ll regret.
We run an accounting firm, and the line of credit conversation happens with almost every client heading into a heavy cash quarter. Here’s what the bank asks for, what the line is for, and how to pick the number.
What do banks require for a business line of credit?
A short list, and every item on it comes out of closed books or doesn’t come at all.
- Two years of business tax returns. Filed, not extended. A return still on extension in October is a delay at best.
- Year-to-date financials. A profit and loss and balance sheet through the most recent closed month. “Closed” is the word: the bank’s underwriter will compare the cash on the balance sheet to your bank statements, and the loan balances on it to your lenders’ statements. If they don’t match, the application stalls while you explain.
- A current balance sheet where the loans match the lender. This is the one that trips up businesses whose books were never reconciled. An equipment loan showing $61,000 in the books and $48,000 at the lender is a credibility problem before it’s an accounting one.
- A debt schedule. Every loan, lender, balance, payment, and rate. It should agree with the balance sheet to the dollar.
- Bank statements, usually three to six months, which the underwriter reads for deposits, overdrafts, and NSFs.
- A personal financial statement and personal return for the owners, because a line for a small business is nearly always personally guaranteed.
If your books are closed monthly, this package takes about ten minutes to assemble. If they aren’t, the application is a cleanup project with a bank waiting on the other end of it, and that’s the version that happens in December.
What a line of credit is for
Timing gaps. That’s it.
A line covers the weeks between paying for the work and getting paid for it: the two-payroll month, the materials for the job that doesn’t bill until completion, the quarterly estimate that lands in the same week as rent. You draw when the gap opens, repay when the customer pays, and the balance goes back to zero. Interest is charged only on what’s drawn, so an undrawn line costs little or nothing to have.
What a line is not for is a structural loss. If the business spends more than it earns every month, a line doesn’t fix that; it delays finding it out and adds interest to the problem. The forecast tells you which situation you’re in. A low point in week six that recovers by week ten is a timing gap. A balance that drifts down every week for thirteen weeks is margin, and the fix is pricing or cost, not credit.
The other thing a line isn’t for is equipment. A truck or a walk-in cooler is a term loan matched to the asset’s life. Buying it on the line ties up the buffer you set up for timing, permanently.
How big should my line of credit be?
Size it from the 13-week forecast. Find the deepest negative week, the point where projected cash is lowest after payroll, rent, loan payments, and the estimate all land. That’s the gap the line has to cover. Add a margin for the customer who pays two weeks later than the forecast assumed and the surprise that isn’t in it yet.
If the forecast never goes negative, size it to the worst plausible week: the biggest customer paying 45 days late in the month with three payrolls. The point is a number with a reason, not a round figure the banker suggested.
A line sized this way is usually smaller than owners expect and larger than banks offer unprompted, which is why walking in with a forecast changes the conversation. You’re not asking how much they’ll give you. You’re telling them what you need and why.
When should a small business get a line of credit?
Now, if you don’t have one, and specifically in a strong quarter. The underwriter is reading your year-to-date. A business showing profit through September, with cash in the bank and a balance sheet that ties, is an easy approval. The same business in late December, with the seasonal dip in the numbers and an overdraft last week, is a harder file for a slower committee.
There’s also the lead time. A bank line can take two to six weeks from application to funding, longer if the file is incomplete or the books raise questions. A line applied for in October is funded before the holidays. One applied for in December is funded in February, after the problem it was meant to solve.
What waiting costs: a worse rate, because you’re negotiating from need; a slower approval, because the file is weaker; or a no, followed by the online lenders whose “lines” are short-term advances at rates that would embarrass a credit card. Every one of those is the price of asking at the wrong time.
What a CFO does with this number
A fractional CFO keeps the line undrawn and the forecast current. Those two things together are the whole discipline. The forecast is updated weekly, so the week the line will be needed is visible a month out. The draw is planned, not panicked. The repayment is in the forecast the week the customer’s payment lands. And the balance goes back to zero, so the line is still there for the next gap.
The CFO also renews it. Lines get reviewed annually, and the bank asks for the same package again. Closed books mean the renewal is a formality. Books that drifted mean a line that gets cut at the worst moment.
Where we come in
Our monthly close produces the lender package in about ten minutes: year-to-date financials, a balance sheet where every loan matches the lender’s statement, and a debt schedule that agrees with it. Tax returns are filed on time because the books they come from are closed, so the two years of returns are done, not extended. For advisory clients, the 13-week forecast sizes the line, and the weekly update tells you when to draw and when you’re clear.
If you’re heading into a heavy cash quarter without a line, or your books couldn’t survive an underwriter’s tie-out, reach out. We’ll start with a two-hour diagnostic, get the balance sheet to match the lenders, and build the package before you need it.
Frequently asked questions
When should I set up a line of credit?
Before you need it, ideally in a strong quarter, because banks lend to businesses that don’t need the money.
What will the bank ask for?
Two years of tax returns, year-to-date financials, and a current balance sheet with loan balances that match the lender statements.
How big should it be?
The deepest negative week in your 13-week forecast plus a margin, and it should cover timing gaps, not losses.
