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Tips On Creating A Solid Business Line of Credit

By definition, a business line of credit is a form of small business loans offered by banks to business owners and clients that allows them to withdraw cash up to a pre-set amount with or without collateral. Charges vary but usually, payments are made on a monthly basis. It is an open-ended loan and will remain open ffor months or years until the client discontinues use or terminates the arrangement.

A business line of credit is a very useful financing tool especially for expenditures that are not foreseen and immediate financing needs that cannot be covered by the company’s current cash flow. Many small business owners have integrated such funding option to their company’s finances to ensure that operations are not interrupted and income generation is sustained despite financial emergencies.

In building a line of credit for your company. You must first consider the existing relationship you have with your bank. Most banks are more keen to offer this kind of service to people they know, especially with those they have good working experiences with. If you have established a good relationship with your bank, most likely they will provide you with a business credit line without asking you for a collateral.

Banks tend to look at a borrower’s capacity to pay the terms, so credit scores are important. If your credit scores as well as your income reports pass a bank’s credit requirements, then you are likely will be offered a credit line. It is important to note that banks have varying standards when it comes to offering credit lines. But the most common practice is that if your debt ratio is over 40%, then you will be denied the service.

A business’ profitability is also important. Since you will be applying for a credit line believing that your primary source of income can cover the expenses should you opt to use it, it is only logical that banks take a look at your company’s financial strength. If your company has existing debts but has paid for them on a regular basis, you will be offered a credit line. However, if your company shows little profit, you might still be able to obtain the service but a collateral may be required from you to initiate the arrangement.

It is important to remember that most banks, if not all, only offer a business credit line to companies that have been in operation for two years minimum. This means the service is not available to nor intended for business start ups or companies still in the development phase.

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Who is supporting small business?

The WSJ posted a great opinion piece on credit and the fact small businesses can’t seem to get any . . .

Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.

The banks get bailouts, while small businesses are left out in the cold.  Why do small businesses matter so much? In the U.S., small businesses employ 50% of the country’s workforce and contribute 38% of GDP. If you truly want to support economy, you have to support small businesses.

The Credit Crunch Continues

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Tags: Credit Crunch, credit-card lines, funding source, Small business loans, small businesses, support small businesses