The truth about lines of credit for businesses is yet to be known by both existing and aspiring entrepreneurs. This is so because most of the sources available to provide information concerning lines of credit are too generic and inaccurate. As a result, many people have found themselves in problems in their efforts to use a line of credit to establish their businesses.
Prior to considering this option to revamp your business idea, here are important things you should do:
- Learn how it works;
- Check if you meet the qualifications;
- Look at its merits and demerits
- Choosing your best option.
The Myth about Lines of Credit
People out there are meant to believe that their business plan is the ultimate factor considered by a bank before it can give them business line of credit. This has been the belief going around in the market for a number of years. Well, this is not usually the case.
You cannot get a line of credit with mere words of persuasion. However, it does not mean that you cannot access a line of credit if you are just getting started. You still can but there are very vital requirements that should be met before you can qualify for any loan for your business.
What a Line of Credit actually is
By definition, a line of credit is basically a financial product that allows an entrepreneur to withdraw funds for their business up to an already predetermined amount. Charges are paid on the outstanding balance. This works just like when taking an advance from your credit card. However, it is somewhat sophisticated.
You can use a line of credit to pay for supplies or for your operating expenses. That’s not all. Lines of credit are largely flexible. You can even use them to cover gaps in your cash flow. As a result of this, they are very common with business owners. However, a line of credit may not be a good option to use when making payment for big capital expenditures like machinery.
Getting a Line of Credit
The truth is that, lines of credit are not easy to get. Giving out money on loan is risky and banks tend to be extra careful. There will be many requirements by the bank should you consider going for a line of credit. When the bank is sure that you are in a position to pay the loan back, it can then issue it to you. Here are important criteria used by banks when issuing loans of this nature.
- A good credit rating
- A noticeable cashflow
- Collateral to secure the loan
For a line of credit to be issued, you should meet these three requirements without any exceptions. Credit rating tells much about your character and since the business is the main source to repay the line of credit, it should have a good cashflow. More than that, you should provide some collateral against the line of credit to act as security should you fail to pay the loan as agreed.
While startups don’t have cashflow to show, they can still be given a line of credit. However, it is the already existing companies that can easily get a business line of credit due to the available records showing the history of their operations. To be able to keep a line of credit, a bank will make the following demands. These are like covenants that will be added to the loan agreements and you should meet them:
- Your company should keep certain financial rations
- You should pay back the line of credit on a regular basis
- The loan should be used for the purpose as agreed upon during the application
- You should notify the bank of specific material events
Secured Lines of Credit
For such applications as those of a startup, getting a line of credit can be quite difficult. However, it can be given against your asset. The amount you will qualify for is usually gauged against the strength or value of your asset. In that case, the asset will be used as collateral against the line of credit.
Common assets that are usually used are a car, your home and such like things. In the event that you are not able to pay back the loan, the bank will foreclose on the asset and recover its money.
The Bottom Line
Lines of credit are a good option to boost your business. However, you should be aware of the ins and outs of these kind of facilities. Ensure that you have good credit, cashflows and assets that could help you get a line of credit with ease.