A business line of credit is designed to meet your short-term working capital needs. You can tap into it when you need it. For example, you might use it for inventory purchases or to pay operating expenses.
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There's a maximum amount that you can borrow. Once you hit that maximum, your access to additional capital ends. A business line of credit is a better option than just putting expenses on credit cards. That's because the line of credit interest rate is typically much lower than credit card interest rates.
A business line of credit is one of the most common forms of financing offered by financial institutions. Generally, collateral and loan guaranty are not required for approval, unless the applicant's basic credit criteria is not met. In financial terms, that means it's an unsecured loan. In some cases, however, line of credit facilities are secured by a lien on the assets of the company.
How Do I Get a Business Line of Credit?
Getting a business line of credit involves completing a financial application. You will likely need certified business and personal tax returns for the past three years, personal statements and other supplemental information. These documents should be ready prior to submission of an application.
The amount of the business line of credit will depend on your firm's historical revenues and its projected annual revenues and cash flow. Generally speaking, a positive cash flow is required to get a business line of credit. Your business has to be profitable and you need to demonstrate that the debt can be repaid on a regular basis.
Once you get a line of credit, you can borrow up to the maximum amount approved. This may be done in one lump sum or incrementally.
A business line of credit is usually a revolving loan and therefore will have no fixed terms. The repayment terms may simply require that monthly interest payments to be made.
Typically, a business line of credit will require full payment (principle and interest) of the amount drawn prior to the maturity date. The business may repay any amount borrowed and re-draw funds as needed without exceeding the authorized amount.
If you can get a business line of credit from your bank, it's a good idea to get it even if you don't need the money now. You never know when you might need some working capital.