Line of Credit Myths and Misperceptions
There is a lot of confusion about business lines of credit, even though they are the most common form of small business financing. That's unfortunate because a line of credit can be a lifeline for a small company--once you learn the truth about line of credit myths and misperceptions.
A business line of credit should be a convenient financing tool for small and medium-sized companies.
Whether it's used to handle everyday working capital requirements or to smooth over seasonal cash flow fluctuations, a line of credit provides quick and easy access to the funds you need, when you need them.
But business lines of credit are often rendered ineffective due to the myths and misperceptions that surround them. Some entrepreneurs have it in their heads that lenders hand out lines of credit willy-nilly, while others are convinced that they couldn't get a line of credit if their life depended on it.
The reality lies somewhere in the middle. Instead of basing your decision to pursue line of credit financing on rumors and hearsay, take a look at the truth behind these common line of credit myths.
Myth #1: Lenders don't issue lines of credit to small businesses anymore.
These days, there is a common misperception that lenders don't want to issue lines of credit to small businesses. The recent debacle in the financial markets has clearly caused lenders to tighten up commercial loans. But as long as your company meets reasonable lending standards, banks will be happy to set you up with a line of credit.
Myth #2: Banks prefer to lend to corporations.
For some reason, many entrepreneurs also seem to think that banks prefer to lend to corporations. While there is some truth to the fact that investors prefer corporations, banks and commercial lenders are willing to extend lines of credit to any type of business entity. However, you should understand that banks may have slightly different loan requirements for each type of business structure.
Myth #3: A business line of credit doesn't require a personal guarantee.
Whether you like it or not, there's a good chance that your lender will require a personal guarantee on your business line of credit. This isn't necessarily due to the current lending environment. Commercial lenders have traditionally sought to protect their investment through personal guarantees. A personal guarantee requirement may apply whether you are a sole proprietorship, a partnership, or corporation.
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