A business line of credit (LOC) is an open-ended access to credit from a bank for cash or from another company for ongoing goods or services. To receive an LOC from a bank or lending institution, the business must demonstrate a positive cash flow because the size of the LOC will depend on the business’s revenue performance. They must have a past, present and projected future ability to pay the amount credit they request.
A business should make sure they are getting an LOC from a reputable firm and understand the terms and conditions before signing a contract. Some lending institutions may offer an LOC that seems too good to be true, which means there is probably a catch. Also, some LOCs come with a variable rate of interest that can have increasing payments over time.
If the line of credit is from a bank or lending institution, it is usually used to:
• Maintain a cash flow
• Launch marketing campaigns
• Upgrade IT systems
• Manage finances during low and high seasons
• Take advantage of business opportunities
If the line of credit is with a vendor, the letter is a written record of the request and clearly states the business’s intention to regularly purchase goods or services from the vendor. The letter should contain the name of the company that wants to open a line of credit and the name of the company giving the credit.
The letter should clearly state the reason why the business is asking for an LOC. It can mention that the product or service the business receives from the vendor is excellent and that an ongoing supply will be required. It can also mention that paying for purchases each time requires paperwork that can be reduced to a one-time-payment at the end of the month.
If applicable, the business can mention the number of years or months they have been purchasing from the vendor and how much they plan to continue to spend each month. For example, if the business is a restaurant and it purchases fresh vegetables from a local farmer’s market worth $150 every day, the letter can state that the restaurant plans to continue spending this amount for the foreseeable future.
It can set up a LOC with the vendor so that a representative of the restaurant can purchase vegetables every day without paying. At the end of the month, the vendor sends a bill to the restaurant. The LOC may be for one year, with the option to renew at that time.
Request a Payment Schedule
The letter should also request a payment schedule. For example, the business may want a monthly or quarterly bill. If the business is not an established one, it may request a lower LOC that it actually needs in the beginning, to establish a favorable repayment history. Once the vendor sees that the business makes it payments on time, it may raise the LOC.
A business line of credit will benefit the business requesting and the vendor if all expectations are made clear and met. The requesting business needs to make payments on the due date if they expect to eventually raise the line of credit.
Here is a sample business line of credit letter. It may be considered a legal document, so it should be written in formal, business style and sent by certified mail. The sender should keep a copy.
Business Line of Credit Letter Sample
Sender’s Name
Sender’s Business Name
Business’s Address
City, State, Zip Code
DATE
Receiver’s Name either owner or account’s manager
Vendor’s Company Name
Vendor’s Company Address
City, State, Zip Code
Dear Name of Owner or Account’s Manager:
This letter is a formal request from Name of Company to set up a line of credit with Name of Company. Our plumbing repair staff travels all over the city every day to answer emergency plumbing issues, do regular maintenance and repair water and gas problems. We have a fleet of 10 vans that require a full tank of gasoline every day.
We have been purchasing our gasoline from you for the past seven months, and have paid each time. Since our business is growing, the paperwork for making several daily payments is becoming overwhelming, and we would like to open a line of credit with your business, so our drivers can get gasoline when they need it without paying. We would prefer to make monthly payments.
I have included a document that clearly shows how our company has grown over the past three years, and how much we project it will grow over the next five years. If you require any further information, or have a line of credit application form, I would be happy to meet you to discuss our position further.
I can be reached at Phone Number or at Email Address. I hope we can set this up as soon as possible.
Sincerely,
Signature of Sender
Printed Name of Sender
List of Enclosures: financial statement
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