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For many businesses that are starting out, having cash to fund operations is vital to its early success.? One of the best ways to get emergency funds is to obtain? line of credit from your local bank.? Businesses apply for funds that are pre-approved based on the company?s financial profit.? Sometimes, companies need to use a line of credit to meet short term expenses that comes up through every day operations, but can be quickly repaid through its operating cash flows.? The beauty is that companies may borrow money up to the predetermined credit limit set by the borrowing financial institution at any time as agreed upon by issuing a check or through a bank wire transfer.? When the funds are paid back, the line of credit is increased back to the original amount.? Again, money can be drawn upon again when needed.? Many business owners use lines of credit because the interest rates on are for the most part lower than traditional business loans.? Another added advantage is that having a line of credit can assist in improving a company?s credit rating.? It?s always advisable to apply and have the credit line in place before the need actually arises.? Those that are thinking of obtaining a line of credit should begin the application process early because it can at times be a lengthy and difficult process.?
Things to Know About a Business Line of Credit
On the other hand, borrowers should be aware of some potential disadvantages of using a credit line.? One example is that loan covenants may be a problem for fund availability and sometimes as a result it can be hard to increase your line of credit immediately.? Luckily, there is other types of financing available for companies in need of short term loan but are unable to obtain a line of credit from the bank, or do not wish to go through the long process required. Other types of financing that are more common include full service factoring, accounts receivable financing, and asset based lending.
One type of financing small businesses can use is called full service factoring. In this set up, a company sells off its uncollected accounts receivable to a specialty finance company at a discount.? The company that buys the receivables will make a profit by managing the receivable until it is completely paid off.? Factoring financing is very common practice that helps many companies meet their cash flow needs and is cheap to do.? Another option is called accounts receivable financing also known as A/R financing.? This alternate finance is appropriate for businesses that cannot get a line of credit but are financially sound.? In order to do this, a company needs to pass along all invoices to a finance company.? Through this process, borrowing amount is determined daily and when money is borrowed, an interest rate is calculated based on the total amount used.? Lastly, we have an option called asset based lending.? With this financing, company assets is used as collateral to obtain a loan.? Assets can include accounts receivables, equipment, and inventory.
Before applying for a line of credit, business owners should first determine the amount of credit that their business can obtain.? For many companies, this is a simple task.? Reviewing free cash flow from operations and the amount of interest payments that the business can support based on operations is important.? In addition, companies that apply for a line of credit will need to have a solid? business plan that demonstrates to the bank or other financial organization that your business can service the funds borrowed.? Your company balance sheet is just as important as your cash flow analysis.? Before borrowers meet with their bank, they should work and review with their certified public accountant to calculate the financial metrics that will be reviewed by the banks when they look at your business line of credit application.? A lot of times, your CPA or financial consultant can help business owners apply for a line of credit needed to operate your business.? Typically, it is of utmost importance that owners explain how funds will be used within their business and if it makes good business sense.?
In summary, getting a company line of credit is a not an easy task. It does require a complete review of your company as well as your personal financial history.? Many business owners will be required to provide a substantial personal guarantee, including using their residence and vehicles as collateral when it comes to taking on this type of debt.? Due to what?s at stake, individuals need to carefully analyze the pros and cons that comes with using a bank?s line of credit.
More Resources on Business Lines of Credit:
http://www.bankofamerica.com/small_business/business_financing/index.cfm?template=overview_loc
http://entrepreneurs.about.com/od/financing/a/lineofcredit.htm
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Source: http://www.edustudentloans.com/business-line-of-credit/
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