At some point in your journey as a business owner, you’ll probably need access to additional cash. One way to get access to more money is by opening a line of credit. Here are several advantages to using a line of credit over other methods of financing, followed by some tips for getting a line of credit for your business:
- Better terms than a credit card. A line of credit typically has a lower interest rate than you'll find on a corporate credit card. This is because you're pledging assets to support the advance on your line, whereas a credit card has lower access to those assets. Plus, if you are not careful, use of a credit card can impact your personal credit score!
- More flexible than a term loan. Loans are typically used for larger, one-time capital purchases such as acquiring equipment or real estate. And once you’ve spent proceeds from the loan, you’re locked into a rigid repayment schedule unless you refinance. If you do refinance, you’ll have to foot the bill for higher closing costs than is typical with a line of credit. Plus, as long as you have assets available to secure your line of credit, you can always pay back and then later advance money on the line as you need it.
- Ideal for short-term cash needs. A line of credit is a good solution if your business is seasonal in nature. You can use the line to purchase inventory, then pay it back when the inventory is later sold.
Getting a Line of Credit for Your Business
Here are some tips for getting a line of credit for your business.
- Build a solid profit and credit history. The best time to apply for a line of credit is when your business has a track record of being profitable and can demonstrate a good credit history. You’ll be able to negotiate better interest rates, credit limits and terms if your business is on solid ground when applying for the line.
- Remember the bank wants collateral. Lenders will want assurances that you can repay the line of credit. They do this by creating formulas of how much you can advance against the value of your other assets like receivables and inventory.
- Be prepared to explain why you need the line of credit. When applying for a loan, you normally have a specific asset you want to purchase such as a building or a new piece of equipment. Explaining why your business needs a line of credit is equally important. So be prepared to show your banker how the line will be used by preparing a monthly financial forecast that explains when cash will be withdrawn and when the cash will be repaid.
- Apply for the line of credit before you need it. Consider starting discussions with your banker about applying for the line well before you think you need it. The best case scenario is you get approved, as an example, for a $100,000 line of credit that you never end up using. But as the past 24 months have demonstrated to many business owners, you just never know when the next emergency will come around the corner.
Please call if you have any questions about applying for or using a line of credit for your business.