A business lines of credit can be a critical financial tool for businesses, especially those businesses who sometimes need immediate access to funds. Every business faces situations where there is an urgent need for cash. The most popular reasons a business may turn to a line of credit include:
- Limited cash because of a seasonal spike in demand
- Unforeseen expenses such as critical machinery needing repairs or replacement
- Lack of cash because of unpaid receivables
A business line of credit is often the first choice for small businesses in any such situations. One main reason for their popularity is the ‘revolving’ funding options. This means you can borrow as much as you need, repay it and then have the entire credit line accessible to you again. Taking out a line of credit for your business enables you to proceed confidently with operational decisions or critical expenses, knowing that you have the capital to back it up.
For a new business owner, it pays to understand more about securing a line of credit so you know where to turn during financial crunches.
Before the line of credit application
Before you even apply for your brand new business line of credit, here are some critical aspects to know:
Let’s start with the two main types of lines of credit, secured and unsecured.
Secured business line of credit
A business line of credit may be secured or unsecured. A secured line of credit has collateral underlying the credit. This collateral may be your office or warehouse, your inventory, equipment, and machinery used in your business, or even your accounts receivable(payment owed to you by your customers). For a brand-new business with limited financial records to show, the only way to get financing may be to get a secured business line of credit.
Unsecured business line of credit
The other kind is the unsecured line of credit that does not require collateral. A more established firm with a good financial track record can get a line of credit without pledging collateral or other assets to secure the loan.
Main factors in determining your eligibility of a business line of credit
Some of the major factors in qualifying for a line of credit include time in business, profitability, and business performance. We will review those below.
Time in Business
How many years your firm has been operational in the market makes a difference in how easily you can get a business line of credit. For major financial institutions, businesses must have been in operation for at least two years to qualify for these credit lines. Income tax returns from the past two years is usually a requirement alongside the application. However, there are lenders who offer lines of credit to start-ups too.
Business profitability is another aspect scrutinized by a lender whetting a line of credit application. Have your business financial statements, especially the profit and loss statements, at hand. A business that has been steadily making reasonable profits is evidently a good candidate for a lender to give a line of credit.
Business performance ratios such as the debt to equity ratio, debt service ratio, and others tell the lender how well your business is performing. Keep the numbers ready along with your application.
A strong business plan tells the lender that you have a clear vision of where your business needs to go and how you will take it there. If you don’t have a business plan yet, consider making one with expert help to reassure lenders that the person at the helm knows what he/ she is doing.
How to apply for your business line of credit?
The first step here is for you to decide exactly how much you need by way of your line of credit. Unlike factoring or purchase order finance, the line of credit offers you access to a predetermined amount. However, you can use a portion of the total amount if you do not need the sum entirely. You pay interest on only the sum used and only for the duration over which it is used. Keep this in mind when deciding the upper limit for your business line of credit.
You already saw that the lender verifies your credentials and evaluates your business’s potential for growth and profit when you make the application. To enable this, you present, along with the application:
- Tax returns (usually for the past two years)
- Bank statements
- Financial statements
Personal guarantees and business lines of credit
Note that lenders may ask for your personal tax and financial records as well. If you are taking a secured loan, then you have to provide the asset that will secure the loan. Some lenders offer lines against personal assets held at the bank like a CD, securities, or other accounts.
If your business is owned by more than one person, then all of your signatures must appear on the application form. Generally, owners with more than 20% stake in the business must all be co-applicants.
The actual process of applying for a business line of credit is quite simple. Almost all lenders have an online option that you can use. Just click on the right links on their website, and you will be guided through the entire application process. Upload the verification documents and other data needed and complete the application as required. That’s it. Your application is evaluated and approved by the lender, and then you are intimated of the same.
Approval time for a business line of credit
The approval time can range from a few minutes to a few days. This depends on the lender you have approached, the amount you need, and a few other factors. Take a look at the approval time claims made by various lenders before you decide which one to go with.
There are different sources you can approach for a business line of credit. Commercial banks, credit unions, community banks, traditional lenders, online lenders, and online banks are all options that may offer varying terms on the line of credit. Do your comparison shopping well before you apply for one.
A business line of credit is a simple solution when you need finances to address a range of business needs. The advantage of paying only for the sum you use makes this a very attractive option for small businesses that cannot exactly predict how much funding they’ll need for the near future. With a line of credit open and accessible, the business owner can quickly leverage opportunities that open up without thinking about the means to arrange capital. That makes the line of credit a flexible, practical, and cost-effective financial tool to address a need for funds.
Contact us today to secure a line of credit to support your business. You can Apply Here and get started right away.