Line of credit increase requests are a fairly common occurrence for business lenders.
As borrowers outgrow their current line of credit limits, it's only natural for them to approach their lenders about increasing the line of credit ceiling. In many lending scenarios, an line of credit increase is actually a sign of a healthy and growing business.
But line of credit increase requests also have a dark side. Although an line of credit increase can indicate that the business is growing it can also indicate that the business is in trouble, starved for cash in the current lending cycle because it is unable to repay the principal from the previous one. In rare instances, the lender may allow the borrower to convert the outstanding principal portion of the line of credit to a capital loan. However, it's more likely that the borrower will request a line of credit increase, just like they would if the business was thriving.
Line of credit increase requests always require documentation to demonstrate the company's financial position to the lender. Specific document requirements vary from lender to lender, but you can usually count on being asked to produce the following information:
- Current financials. When you request a line of credit increase, your lender will definitely want to see your current earnings and cashflow statements. If your request falls between scheduled quarterly reporting periods, be prepared to provide the most recent quarterly financials and pro forma financials for the current period.
- Historic financials. Lenders will also want to see historic financials (last 3-5 years). These documents will help them distinguish between a genuine growth trend and a declining business model that is experiencing a cashflow crisis.
- Balance sheets. The majority of business lenders are savvy professionals who appreciate the value of a good balance sheet. Again, growth trends on the balance sheet will support your request, especially if you can establish that an increased line of credit won't jeopardize your company's net financial position.
- Business plan. An updated business plan is standard operating procedure for many business lenders. The business plan should include forecasting elements that demonstrate the impact of the increased line of credit on financials, operations, and other important areas of the business.