Establishing A Business Line Of Credit for a new business Must Be a Prime Objective
Most people are quite familiar with credit cards and their use for personal purposes, but you may not know that a business line of credit will work in the same fashion for any business, new or old.
A business line of credit for a new business is different from a loan, where a lender will advance you some amount upfront, and you would have to pay interest on that entire amount as long as you choose not to repay the loan. In a business line of credit, a lender, in most cases banks, sanction a certain amount as a line of credit. The business can draw on this amount in parts and is charged interest for only the amounts withdrawn while leaving the rest with the lender, with an assurance that it can draw on it at any time.
Will the bank want collateral?
For a new business, it is not always required but often necessary that the borrowing business that requires the line of credit will have to provide some collateral in the form of property, inventory, accounts receivable, or others as acceptable to the lender. It is only after a business has been in operation profitably for some years, that lenders will extend lines of credit without insisting on collateral. They may still ask for personal guarantees from the owners, but the fact that the business is managed and operated properly greatly reduces their risk.
What can the funds be used for?
A business line of credit allows a business to pay its own bills, before their customers pay for the goods or services sold to them, and helps tremendously in maintaining cash flows, setting up inventories and meeting internal expenses, without having t worry about the credit that it has extended to its own customers. These lines of credit can also be used to purchase equipment or meet long term capital expenses that it has incurred.
New business owners must understand that establishing a business line of credit can require them to first evaluate their own finances before approaching any lender for a line of credit. They must make a realistic assessment of the amount of debt that they or their business can comfortably handle. The lender will insist on knowing any current debts and how they are being repaid, and the capacity of the business to handle additional debt that the line of credit will bring.
Business Assets Available
The business must clearly understand the current assets that it has in the form of real estate, investments or savings that can be used in case the required income from the business is not forthcoming. This assessment must be conservative and based on actual market conditions, and not any hopes of increased values over time. Any assets that are offered as collateral can only support one debt, and preferably an asset offered as collateral for a business line of credit must be otherwise unencumbered. Every lender will have his own set of conditions, that can vary depending on the purpose of the loan, the amount required, and the market or economic conditions at the time the loan in the form of a business line of credit is taken. Lenders and financial institutions will take into account the past history of the business owner or owners and how they have handled their previous debts.
Any business needs working capital to run its operations, and for a new business, this is often in the form of self-funding which will often be limited. Lines of credit are loans that new businesses will find difficult to take as they have yet to establish their credit and have no history that can be referred to. The accent, therefore, will be on their own funds, assets, and perception of their characters by the lenders. Borrowers, on the other hand, need to be very clear about their needs for the line of credit and what they will do with the funds that they utilize. Citing a specific need can be more convincing than a vague one of using it in emergencies that you are not able to identify. Borrowers must also be very accurate about the amount of money they want in their line of credit, and link it up to expenses that are definite and provable. You will always be asked to provide business plans and other documents to authenticate anything that you say, and these must always be realistic and not overly optimistic.
Once you have approached the proper lender, understood the terms of the credit line, make sure that you have the right collateral to offer. The value of this asset must be far in excess of the amount asked for, as lenders will rarely advance you a 100 percent of the value of the asset pledged as collateral. It makes sense to start small and gradually ask for extensions of the lines of credit. You may also inquire about guarantees from small business associations that can greatly ease your discussions with the lender. You will have to prove your credentials with these organizations as well, but for a new business, this can often be a life saver.
A business line of credit for a new business is one of the best ways of financing your fledgling enterprise. It gives you a lot of control as to how you can use the funds that are being made available. There are costs that are needed to be incurred before you can avail this facility, but interest rates are generally lower than other means of raising finance. Make a firm plan of how you will use the line of credit, and as far as possible try to use other methods of financing or negotiations that can control your cash flow, before you dip into this credit.
A business line of credit can be quite effective for growth and definitely to be used instead of a merchant cash advance. It is a form of financing that can be of help to all businesses irrespective of their size. The fact that you have a business line of credit can greatly improve your business standing and also give you an edge over others whom you have to deal with during the operations of your business. Being regular in timely payments can greatly add to your credit rating, as things like merchant cash advances or facing are rarely considered by rating agencies.
A business credit report takes into consideration payments made against debt and their timeliness. Utilizing a business line of credit sensibly and correctly can greatly increase business credit rating and this can go a long way when you want additional credit. Most lines of credit are extended by banks and they make regular reports to credit rating agencies. Careful management of finances and regular payments must be ensured once you have established a line of credit. Keep within the limits imposed and plan your expenditures wisely and soon you will have the lender probably asking you whether you need an extension in the line of credit.
Where to apply for the line of credit?
A small business can try to obtain this line of credit from one of the major banks that has a reputation in the financing world. If you have excellent credit and sound assets to put up as collateral then you have a good chance at getting approved. Once this is obtained it can by itself act as an advertisement of the sound way your business is being run, as vendors, customers, and even competitors will know it indicates that your business is being run on sound lines that these banks have found acceptable. It is well known that new people who want to do business with your firm will ask for bank references and if you have been good in dealing with your line of credit, you will get an advantage when the bank certifies you as a sound and reliable party.
Turned down by the big banks?
Big banks turn down on average over 50% of business line of credit applications. Lenders like Neal Business Funding have more financing programs for small business and have more lenient credit requirements. For this reason small businesses are often getting these lines of credit from alternative lenders like Neal Business Funding.
You must remember that banks would like you to use any lines of credit that you have asked them for. So use your credit to cover cash shortfalls, by paying overdue bills, and return the amount to the bank as soon as you have been paid by your customers. You must establish this business line of credit before you feel any need for financing so that when the need does arise, you have the money. Credit lines can give you a lot of short term flexibility. They should preferably be used only for operations that are going to generate cash for you in the near future. Using them for any project that is not likely to see any return in the near future is a sure way of getting into a financial hole.
It is wrong to use the line of credit for anything that does not have the prospects of producing any immediate benefit. Banks are always keen to see that the line of credit is always being used, but will be equally concerned if you do not make constant payments into the account so that your outstanding balance is almost zero. This assures them that you have the capacity to repay, and the more you use the line of credit and square the account the happier they will be. Make use of this line of credit constantly even if you have other resources, as you can never say when business conditions will change and you will need a line of credit for real.
A business line of credit for a new business can be a vital asset to growing your business. We all know it takes money to make money and your new line of credit will help you to accomplish this goal. Apply now for your business line of credit at NealFunding.com.