How to use a business line of credit?
A business line of credit is an extremely useful tool for savvy small business owners, but it is not for everyone. If you don't need a business line of credit, don’t apply for it. If you're going to borrow, do it for a purpose, and only borrow the amount you need. Is a $10,000 loan really necessary for the expansion? Is a $1,000 loan enough to achieve the same goal? It should be obvious.
What is a Business Line of Credit?
A business line of credit is similar to a credit card in that you can use it whenever you need it, as long as you don't exceed the established credit limit. If you have a line of credit, you can withdraw cash to cover any expenses you have to pay. There are some important differences between a line of credit and a business credit card. The biggest difference is that with a line of credit, you have to apply for and be approved for the credit line you need. When applying for a line of credit, you must provide a detailed description of your business. All your bank statements and a description of your business assets are required. It's important that the bank has an accurate picture of your business so it can determine whether or not to approve your application.
Applying is free and will not affect your credit score.
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How a Small Business Line of Credit Works
Similar to credit cards, business lines of credit work the same way. A repayment period is part of a business line of credit. Short-term business loans and a line of credit can be used for small business expenses. You can use a credit card or a business line of credit for expenses that don't require you to have cash on hand. If you and your spouse are the owners of a "bare bones" business, you don't need much money for overhead. If you decide to go ahead with this idea, you should take out a small personal loan from a bank in the amount of $5,000 to get you started. You can apply for a bigger business line of credit after that.
The Two Different Types of Business Line of Credit
These differences aren't always significant, but they can be if you choose to use your LOC incorrectly. By educating yourself about these options and learning how to best manage each one, you'll find the credit line that's right for your business.
Secured Business Line of Credit
This type of line of credit requires the business to pledge specific assets as collateral to secure the line. Since a line of credit is a short-term liability, most lenders require only short-term assets, such as accounts receivable and inventory, as collateral. Lenders don’t usually require any long-term assets, such as real property or equipment, as security for a LOC. If the borrower is unable to repay the line, the lender will assume the ownership of any collateral and liquidate it to pay off the balance.
Unsecured Business Line of Credit
This type of LOC does not require specified collateral, however a general lien and personal guarantee will likely be required. Because there is no specified collateral associated with this type of credit line, the business will need a stronger credit profile, plus a positive business record to qualify. Additionally, interest rates may be slightly higher, and unsecured LOC's are often smaller.
The Pros of a Business Line of Credit
Your current assets minus your current liabilities are called working capital. When working capital is tight, you are going to have time. It allows you to pay for payroll, inventory and other costs. Too much working capital can be detrimental to your business. If you have too much working capital, it will be a problem. Your bills are late. Your collection agency costs will increase. You can't get financing if it hinders your ability. It can cause you to go into debt. There is a place where working capital is appropriate. It keeps you healthy and profitable. A healthy balance in your working capital allows you to have enough money to keep your business growing and profitable, but not so much that it becomes overburdened with debt or too cumbersome to manage.
When to Apply For a Small Business Line of Credit?
Business can not always wait for the right time to apply for a business line of credit. If a business can plan when to borrow, they can secure strong interest rates for larger amounts of money with a reasonable repayment schedule. You'll learn from this issue. Let's talk about why your company should consider borrowing against its credit history. Many banks and other financial institutions are hesitant to lend to companies that have weak credit histories. This is unfortunate because in many cases, this is exactly what it is.
For example, a seasonal business that generates most of its sales in the summer could use a LOC in the offseason to help cover overhead as they bridged from one season to the next. A small business could use a LOC to finance a marketing campaign, which would attract new customers and expand sales. The borrowed funds could be paid off quickly because the campaign would potentially generate additional revenue. Don't hesitate to contact
our professional loan advisors if you have any questions.
