Are you currently experiencing short-term cash-flow problems? Starting and growing your small business requires capital. Opening a business line of credit can help you by offering cash to draw from your credit line when you need it. One of the major advantages of a business line of credit is it can help you ease the interest rates on the amount you borrow. That is because you don’t pay interest until you need to use the money.
What is Business Line of Credit?
A business line of credit is a flexible revolving credit that provides you quick access to cash. A lender or bank may approve your business for a certain amount of cash. When you draw the line, you deduct that number from the total credit limit to figure out available credit.
Where to Use a Business Lines of Credit
- Working Capital
- Cover seasonal fluctuations
- Asset Purchase
- Cash flow
How to Establish a Business Line of Credit
- Normally banks will not provide a line of credit to new or startup businesses without repayment guarantee of business owner.
- In case the business is new or startup and the bank is not contented with the repayment sources, they will probably as you to provide collateral for funding.
- If you run a corporation or a partnership business, the bank will definitely ask for collateral for the loan from all the principals involved.
- You need to provide financial documents that follow accounting practices to get a line of credit.
- You also need to provide cash flow statements, balance sheets and income statements to help the lender demonstrate your repayment ability.
What You Need To Have For Getting a Line of Credit
- Business Licenses
- Tax Returns
- 2-3 months of bank statements
- A business bank account
- Standard financial documents
Pros of Business Line Of Credit
- You only pay what you use
- Apply once and reuse when needed
- Credit limits up to $500,000
- Manageable monthly payments
- Can be used as overdraft protection
Cons of Business Line Of Credit
- Have an annual fee
- Flexible interest rate
- Might need to have an established business income history
- The lender have the right to reduce lines of credit
Mistakes to Avoid When Applying For a Line of Credit
Don’t Know Where To Use Funds
You need to determine the use of business line of credit before applying for one. Having a long-term plan demonstrates you to your lenders as a favorable borrower.
Applying When Needed
This one is considered as a huge mistake. You have to apply for a business line of credit before you need it. In case you apply for business line of credit when your business is growing with positive cash flow, you will get funding when the lender evaluates your business financial statements.
Don’t Rush Out
Don’t rush out when filling out the application. Mistakes like incorrect personal information and others can happen that can cause some serious problems, therefore it is advised to take your time when filling out the loan application. As with any decision to deal with debt, weigh your decision to get a business line of credit cautiously.