One of the most desired option for handling regular cash flow for any small business’s requirements has been a business line of credit. Line of Credit (LOC) is a specified amount of money that you can access as and when needed which have to be repaid immediately or over a pre-specified period of time.
LOCs are specifically designed to help businesses finance short-term working capital needs like –
When you open a line of credit, you’ll receive permission to use a specified amount of funds as and when it is needed. You then receive a monthly invoice reflecting the amount of credit you’ve used, along with any interest charges.
Your payment is based on the actual interest accrued on these funds while you use them. Once the funds are repaid, that amount is available when you need it. You’re only charged interest on the amount of the loan you actually use.
LOC rates and limits are set by lenders and based on your risk grade, your collateral, and any servicing requirements. Here your risk grade is based on factors like the financial success of your business, the state of your business sector in general, your business and personal credit scores, and whether or not you have collateral.
Most lenders will charge an annual fee for the LOC, in addition to interest charges. If you’re going to need a significant number of loan advances and repayments, transaction fees might apply.
If your business regularly requires funds to cover short-term cash flow issues, manage your business’ day-to-day needs, or take advantage of immediate business opportunities, then applying for an LOC makes sense.
Any lender will want to see your business’ documents, including financial statements, tax returns, your resume and an explanation of your business history. The lender also will expect to see a three-year projection of business revenues and expenses, with an explanation of how and when the LOC would be used to support your cash flow. You might also be asked to provide detailed schedules of the company’ accounts receivable, inventory and all liabilities.
Lenders look critically at LOC applications to determine whether the company needs funding to cover growth opportunities. Lenders generally avoid providing funding to startups, for covering losses on past operations, or to meet immediate expenses that won’t necessarily lead to profits.
Make sure that your business displays that –
Business lines of credit offer financial flexibility to cover gaps in the normal business cash cycles, thus helping small businesses grow revenues and expand profits. They can be used to harness the necessary resources to maintain activity year-round and can fund expenses to develop your vision, build your organization, and amplify success.