Line of Credit
1. What's a line of credit?
2. Who's it good for?
3. When is this the best choice
4. When is this not advised?
5. Tips for getting the money.
6. Ingredients you'll need on
7. Watch out for!
8. Web Links.
9. Before you apply!
What's a line of credit?
A line of credit lets you draw on funds, as needed, for routine
operating expenses up to the maximum amount of the credit line.
Credit lines enable businesses to better manage cash flow. They
usually carry a much lower interest rate than credit cards but somewhat
higher than bank loans for a specific amount and purchase. Credit
lines, like bank loans, are usually only available to profitable,
established businesses and can be secured or unsecured. There is
often a minimal annual fee.
is this good for?
- To even out cash flow when fluctuations are predictable, seasonal,
or industry-specific. Example: a manufacturer of Christmas decorations
needs cash in July when buying materials and in September for
shipping, but the income isn't received until January. A credit
line can handle those needs.
- For purchases too large for a credit card but too small for
- As an "insurance" policy for a healthy business.
is this the best choice for me?
- When there's a predictable, short-term, cash shortage.
- To finance cost of goods for firm orders already received (excellent
- Whenever you have a profitable company, even if you don't have
an immediate cash flow problem. Consider it as a back-up for the
inevitable cash crunch.
is this not advised?
For very large, tangible purchases such as real estate, construction,
or major equipment. Better to get a loan which usually has a lower
interest rate and a longer time to repay the amount.
When cash flow shortages may be permanent or for an extensive
period (more than a year). For permanent cash shortages, you need
a long-term plan.
To pay employees, unless the income to cover this is coming soon.
When you're likely to be turned down (business too new, not profitable,
bad personal credit rating). Each request you make for a loan, line
of credit, or credit card shows up on you credit report. If you
make a lot of requests, lenders may eye your record suspiciously,
so try to be sure you meet the criteria before you apply, or you'll
just make it harder to get credit later when you've cleaned up your
credit or been in business longer.
5. Tips for
getting the money
Show your banker industry norms showing that operating with a
line of credit is standard for your line of business.
Present a history of careful financial management through profitability,
good financial records, clean credit.
Show the bank orders received which will pay off the line of credit.
Shop around; specifics of lines of credit vary. One bank might
issue you a nonrenewable 90-day note, while another simply lets
you tap into the money whenever you want. Some banks require you
to completely pay off the line once a year, and then re-open it
after going through a perfunctory application process. Find the
credit line that's right for you.
Ingredients you'll need on hand
- Basic financial
- Business plan.
- Internal balance sheet
- Asset and liability statement
- Projections for sales growth -- in the context of past business
cycles you've weathered -- that outline how the credit line will
push you to the next level of sales or profitability.
High interest rates. For the convenience of having money available
at the stroke of a pen, you may have to pay higher rates than straight
bank loans, but such rates should be well below credit card rates.
Like other bank loans, lines of credit often are secured by inventory
-- equipment, receivables, or, for a startup, personally by you
and other owners of your company. What security does your bank want?
Using your credit line just because it's there. Treat it as a
valuable resource that should only be used for genuine business
Lists publications you can get and has articles on getting a loan,
banking relationships, etc.
Primarily a venture capital source, but includes links to more than
200 banks in the United States, Canada, Europe and Asia.
A guide to banking and financing sources.
Applying for a loan has become so much easier than it used to
be, that you might overlook some important details -- or, worse,
fail to see the big picture -- like the long-lasting effect too
many applications can have on your credit record. So here's a special
checklist and tips to help you handle your application successfully.