|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Business Lines of Credit as a Cash Flow Solution
The economy has come roaring back, and small businesses are beginning to regain their footing. However, for many businesses, entering a growth phase can make it difficult to gauge their cash flow needs. As staff is added or new equipment purchased, there can be an ebb and flow with a business’s cash flow that can often lead to a temporary cash crunch.
The ideal solution for many business owners is to open a business line of credit so they can get quick access to cash when they need it, but that may be easier said than done for businesses with a lack of credit history. However, there are several things business owners can do right now to better position themselves to qualify for a business line of credit (LOC).
What Exactly is a Business Line of Credit?
A business LOC is not unlike any other revolving credit account, such as a credit card or home equity (LOC), that establishes an amount of credit that can be tapped at any time, for any reason. A LOC offers businesses the ultimate flexibility and control over the use and cost of credit. You only pay interest charges on the amount you borrow. Many banks require interest-only payments based on variable rates, but the credit line can be replenished at any time with principal payments.
Lenders rely on specific criteria such as the business’s revenue history, projected cash flow, and financial stability to determine the amount of credit available.
Qualifying for a Business Line of Credit
Established businesses with a track record of steady revenues and sound business management are considered excellent candidates for a business line of credit. Banks will rely on both your personal and business credit and financial standing. For newer businesses business (three years or younger) without an established credit history, a secured line of credit backed by personal assets can be an option.
There are some things business owners, new or established, can do to increase their chances of obtaining a line of credit.
Give Your Business Some Credit
It’s easier than you might think to build a credit history for your business. You start with your suppliers by asking them to extend short credit terms on purchases, such as a 60 or 90-day repayment schedule. Your suppliers will become important references for you.
Next, you can try applying for a gas credit card, which is easier to obtain, but you should always pay the balance in full each month. If you have a personal credit card in good standing with your bank, it may be willing to issue you a business credit card. Having a credit card in your business’s name is the best way to build a credit history. However, because their interest charges can be pretty high, you should only use it to purchase essential items that can be paid in full out of your current cash flow.
Create a Detailed Business Plan
Banks are just as interested in your ability to manage your business as they are in how you manage your credit. A detailed, well-conceived business plan speaks volumes about your abilities and seriousness as a business owner. Your business plan should clearly define your business mission and objectives along with specific strategies for achieving them. It should include detailed financial statements, including a balance sheet and income statement with three years of cash flow history and two years of cash flow projections. The bank will also want to know how you expect to grow your business with marketing and advertising. It may be well worth the expense to pay a business plan expert to help you create a high-quality plan.
Clean up Your Own Financial House
Most banks will require business owners to guarantee their business loans personally, but if your own financial and credit situation is in disarray, the bank may not accept it. Begin immediately improving your situation by paying down existing debt and cleaning up your credit report. You can order a free copy of your credit report from any one of the three credit bureaus to see where you stand.
Build a Banking Relationship
Ideally, it’s best not to wait until you need financing to go to a bank. Small business banks are always interested in starting relationships with small businesses. Business banking specialists can be a great source of advice, support, and networking. They can also help you get in a position to access capital.
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