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Line of Credit
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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.
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.
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.
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 needs.
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.
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