A line of credit for you business works differently than taking a line of credit for you personal needs. A business line of credit also works differently from a business loan. With the line of credit, you can borrow up to the specified limit, and you would only be paying interest on the portion of money that your borrow. So if you business does not need the full $100,000 all at once, it would be smarter to get a line of credit for $100,000 and just take what you need as you need it. This would help avoid paying more interest than is necessary.
To decide if your business could benefit from the line of credit versus the traditional business loan, ask yourself the following questions:
-Does your business need access to short term capital in order to meet the day to day expenses?
-Is your business seasonal, where having a line of credit would help you bridge your busy seasons?
-Does your business need extra capital occasionally in order to keep up with new customers or projects?
-Do you and your business have a good credit history?
There are two different types of business line of credits (LOC). The first is the unsecured line of credit. This is a type of credit that does not have any assets listed as collateral. There is however a general lien and personal guarantee that will be required. Since there is not any collateral securing this loan, it is necessary to have an above average credit history. It is also necessary that your business has a good track record. The unsecured lines of credit usually come with higher interest rates and the limits are typically not very high. The other type of business line of credit is the Secured Business line of Credit. This line of credit is secured against assets the business has. The line of credit is a short term liability, which means the lender will want short term assets. This could include things such as accounts receivable and inventory. If the business owner is not able to repay the line of credit, the lender would assume the ownership of the collateral and liquidate any of it to pay off the balance of the loan.
You may be wondering what the difference is between the Business Line of Credit and a Business Term Loan. A term loan is a fixed amount that the business receives all at once. Payments are made over a specified period of time and will last until the balance is paid in full. With the Business Line of Credit, the business can borrow against the line as needed. The business is able to take money, repay the money and then use the money again. This too is generally for a specified amount of time.
So the business line of credit works by giving the business access to a specified amount of funds. They can use these funds as needed in different payment amounts. The business will receive monthly statements that will show the current amount on the line of credit and any interest charges that have accrued. The interest is only based on the amount that has been borrowed against the line of credit. Once you have paid the amount you borrowed, those funds are immediately available for use again. Different lenders will have different repayment methods Some are weekly while some are monthly, it just depends on the lender. Most Business Line of Credits will also have an annual fee. Sometimes there may be transaction fees associated with the account asl well. Business Line of Credit that are under $100,000 also have the ability to do cash advances by writing checks or using an ACH option.
Each lender is different in how they create their business line of credit. You will want to research different lenders and see what fees, interest rates, and loan conditions their services offer. Some lenders will charge an account set up fee, or a transaction fee and usually annual fees. Some lenders require that the business pays down the line of credit to a zero balance at some point during the year. They might even require the balance to stay at zero for thirty days. This helps the lender feel secure with repayment, knowing that the business is able to have enough cash flow to operate for thirty days without the line of credit. Because the financial market is fickle, and we never know what can happen, some lenders reserve the right to call on the line of credit and make it all due immediately. Make sure you know what fees and terms different lenders offer.
When applying for a Business line of credit, the lender will need to see financial records, along with any documentation that will help solidify the worth of your business getting a line of credit. Other documentation that is needed includes your business license, business bank account, tax returns, 3 months of bank statements for the business, and standard financial documents.
Lenders are known for looking at the five C’s when it comes to approving and determining the size of the line of credit. They include the capacity of what the business will be able to repay. The character, otherwise known as the credit history. The capital, the earnings and savings of the business. Collateral, what can the business put down as security. And the conditions, why is the business requesting the loan and how will the business perform in the current economy. These are the main qualifications and requirements thats banks will consider when determining the dollar amount of the loan that the business will lock in.
Where can you apply to get your business a line of credit? Most banks and financial institution that offer banking services for businesses will also offer loans and lines of credit. Some of the large banks that offer them are Wells Fargo, Bank of America and Capital One. Research has shown that local banks and credit unions are also a great source as well. Local finance entities exist to specifically serve the local community. Therefore, they tend to be a little more flexible when approving credit applications. There are also online sources such as LendingTree and OnDeck. In order to qualify for a business line of credit, your business should be more established. It will also need a good credit history. If your business hasn’t been established for very long, the Small Business Administration does work with select banks to offer these companies business line of credits.
If you decide that your business would benefit from a line of credit, just make sure that you know exactly what you are getting into. Know what fees are associated with your account. It is smart to pay your balance down whenever you can. It is best not to keep your credit line near the max. Make sure your business does not use the line of credit to cover any losses. This can be detrimental to a business. Be smart about when the right time to a do a line of credit for your business is. Most lenders will be more likely to grant the line of credit to a business when they see that the business is thriving. And when the business is thriving, it is obviously going to be more capable of paying back the loan. The line of credit can help give your business the boost that it needs to grow. It is true that you have to spend money to make money. Be sure to use the line of credit wisely. If you have a big event, but do not have the inventory to cover the event, a line of credit would be very useful. It would be beneficial because you know that after the event is over, the money could be repaid right away on the line of credit, reducing any fees and interest associated with it. Sometimes businesses may need to access the line of credit for things such as payroll or unexpected expenses. This is useful in times when cash flow is low but the business must go on. Having a business line of credit may give you the boost to grow your company. But just make sure that before you tap into your line of credit, you run the numbers and make sure that you are going to be able to pay back the loan. You never want to borrow against the line of credit in hopes that something big will come along. You need to make sure that you are confident and ready to pay back the loan.