If your company has an existing credit line facility from banks or financial institution, you might want to increase the credit limit over time.
Revolving line of credit is a popular form of business loan due to its flexibility and ease of use.
A higher credit limit is preferable for most SMEs, in fact the higher the better. Revolving credit lines such as business overdraft or trade financing line provide the company with immediate access to credit that can be tapped into during cash flow emergencies or to exploit unexpected business opportunities.
An increase in credit limit usually bears no cost to the company. A higher credit limit will allow the company more options to maneuver in a situation where quick access to external funds is required. Unlike a typical non-revolving SME loan which has a fixed monthly repayment, a business credit line allows more flexibility.
There are appropriate ways and wrong ways when asking for a credit limit increase from your issuers. So, it is extremely important to be strategic before taking actions.
The worst case scenario that you can get yourself into is when you’ve fully maxed out your credit limit and have to ask your banker for a credit increase.
Increase of business credit limits is not as easy as getting a temporary increase in your personal credit card limit, so it pays to be strategic rather than getting your request rejected.
Here are the 6 tips that will improve the chances of approval or your credit limit increase.
1. Ensure prompt repayment conduct
The banks will definitely keep track of your repayment conduct throughout the year when utilizing your credit line.
Making sure you have a spotless repayment record with your banks will go a long way in improving your chances of credit limit increase.
If you have the habit of making payments in a timely manner, most likely creditors will increase your credit card limit.
Keep your personal credit facilities such as credit cards, car loan and home loan payments healthy and prompt as well. Most banks will also conduct credit bureau rating checks on director’s personal facilities repayment conduct on top of company’s records.
2. Have justifiable reasons
Don’t just rely on dial-talk and request for an increase just because you foresee a business opportunity down the road. Carefully and thoroughly evaluate the reasons why you need the limit increase.
The credit approvers in the bank will require justifiable reasons for approving your credit limit increase. Make their job easier for them.
Present to your bankers PO (purchase orders) or contracts with your customers that reflects a higher order volume than your usual capacity to fulfil.
If you’ve just been awarded a large contract, show the banks the letter of award as well. Basically any document that you have that can justify the reason for a limit increase should be presented for the bank’s evaluation.
Do not request for a credit limit increase if your reasons are unjustifiable such as over extending your credit line and facing a cash flow crunch. This might make things worse and your bank might get spooked out and cut or withdraw your credit line instead.
3. Utilize the credit line often
Try to utilize your line of credit frequently when you don’t have a need for a limit increase. In this way, when situation calls for a limit increase request, the bank will be more favorable to your application.
The reason is simple. If the bank has already granted you a credit line and yet you don’t utilize it at all for a long period, they will be reluctant to increase your limit when you ask for it.
They will be skeptical whether if you’ll utilize the line if they do increase your limit. Without utilizing the line, the bank does not earn any interest income off your account.
Also, with the Basel 3 accord, banks are not able to be too liberal with the total aggregate credit extended in their loan books.
Any increase in your credit limit could be used to extend further credit to other borrower’s line that the banks know from past records, will utilize the facility more often than you.
If you keep your credit line purely as standby funding and simply have no occasion to use it, try to utilize the line at least once every 2-3 months and make payments back quickly so you incur minimal interest.
4. Practice patience- know when to ask
Most banks and financial institutions review your line of credit automatically within 1 year from granting you the line, which is a standard practice
However, if the review doesn’t seem to occur after the 1 year period, you can try to initiate for a review and limit increase request.
Just do note that, it is not advisable for you to give your banks a call to increase limit just a few months after you are granted the line of credit- this could lead to a denial, so it’s better to let it cool for a bit and wait for a year.
5. Don’t ask for too high an increase
If your request is accepted, think twice before asking them to double it. Having 10% to about 25% increase will be a great rule of thumb to remember.
Asking for too much may lead to denial and you have to wait for at least two to three months before you can send them a request again. That’s why it’s better to be a bit more conservative when asking for an increase in credit limit.
Unless you have strong reasons to request for a much higher increase such as upcoming large orders from customer, it pays to be slightly prudent when requesting increase.
6. Have up to date accounts and financials ready
During the annual review of your credit line, always ensure your accounts and financial reports are up to date.
A strong factor that determines whether if the banks will increase your credit limit is your latest year revenue figures.
If your latest financial year turnover figure has increased compared to the previous year’s credit review, most banks will be quite open to increase your limit if you ask for it.
The percentage increase in your limit will tightly correspond with your turnover increase. If you’re revenue improved by 5%-10%, do not expect the banks to increase your credit limit significantly.
Without up to date financials, the credit assessor will not be able to complete their review and this will lead to a delay.
If you’re able to fulfill the above tips, you should be able to obtain increase in your credit limit successfully.
Credit is a double edge sword. Although a higher credit limit will empower you with more ammunition and options, it might also get you stuck into credit trouble.
Utilize credit responsibly and prudently and do not over extend yourself unnecessarily.