Bank Credit Lines

Getting a Small Business Line of Credit

Need a bank credit line? Credit lines are designed to help your company meet day-to-day expenses during a cash flow crunch. We explain why you need a credit line from your bank and how you can get one.

Financing a small business is not easy.

Most small business owners rely upon their own resources to finance their business. These funds may come from a variety of sources including savings, family members, or even from retirement accounts.

While these sources of financing are fine for the start-up phase of a business, they cannot be relied on to meet your ongoing finance needs. For that, you are going to have uncover another reliable source of financing.

Bank credit lines exist to meet small business owners' short-term financing needs. Finding a credit line that's a good fit for your company might not be as difficult as you think. Here are some tips to help you get started:

1. Why do I need a credit line?

Before you start shopping for a credit line, it's important to ask yourself why you need financing. If you need financing to purchase equipment or other capital then a credit line is not the right solution.

Credit lines are designed to help your company meet day-to-day expenses during a cash flow crunch. In industries with uneven income cycles (e.g. agricultural industries), credit lines may also stabilize cash flow by providing interim financing. The repayment period on these loans is shorter than on capital loans because the lender expects the full amount can be repaid from normal business operations.

2. What about credit cards?

Technically, a credit card is a credit line. In recent years, some credit card providers have even marketed products specifically geared for small businesses.

However, unless your business only requires a very small amount financing, credit cards are usually the most expensive type of short-term borrowing available for a small business. Small business credit lines through a commercial bank or other lending institution are a more sensible (and affordable) alternative.

3. How do I secure a small business line of credit?

The place to start is the bank that you currently use for your business checking and investment accounts. By leveraging an existing relationship, you may be able to secure a better deal simply because your bank wants to keep your business.

Regardless of whether you use your current bank or some other commercial lender, there are certain requirements you will most likely be asked to meet. Obviously, the lender will want to take a look at the financial history of your company. Lenders are not likely to offer you a credit line loan for your business unless you are able to demonstrate a history (i.e. more than 2 years) of profitability. Be prepared to provide the lender with access to your company's financial records and tax returns.

The lender may also require co-signers (a.k.a guarantors) or collateral for your loan. Unsecured lines of credit are available for smaller loans, but larger loans are only going to be made in the form of secured financing.

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Conversation Board

What's your take on bank credit lines? Share your thoughts below.

  • AJ Monrovia posted on 8/25/2007
    AJ Monrovia
    The article give good basic information on bank credit lines. However, it would have been better to know which banks are considered more friendly to new start up businesses than others. Are credit unions better for them? Can you please respond?
  • Ken Gaebler posted on 8/27/2007
    Ken Gaebler
    Thanks for your good advice. It's very difficult to generate a list of banks that offer bank credit lines and compare them against each other because there are literally thousands of banks in the United States. If you find a bank that is friendly to small business owners, please come back and post a comment to let others know.
  • Mike posted on 3/17/2009
    Thanks for the article. It would be interesting if there was a comment about the average rates for a credit line. I'm sure it varies a great deal but a general idea would be interesting.

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