Sometimes clients who are owners of restaurtants, shops, and other small businesses ask us for advice when they need a little extra cash flow during busy times of the year. In these cases, a small business line of credit may be a good option.
What is a Line of Credit?
A line of credit works much like a credit card. You can keep borrowing money as you pay off the debt as long as you don’t go over your credit limit. This is called a revolving line of credit and instead of getting a lump sum of cash, you take what you need as you need it. It is important to remember that this type of credit option is perfect for temporary cash flow problems, and it is not a long-term solution. Lines of credit are traditionally taken out with commercial banks, but credit unions and institutional investment firms also offer lines of credit.
When is the Right Time to Apply for a Loan?
Typically, there are two times when a business might approach a bank for a business loan. Perhaps the most obvious is when the business is just starting and needs extra money to cover startup costs. Small businesses also may face times when extra cash flow is needed to fuel expansion or growth. For example, the loan may be used to purchase more inventory to increase sales during a busy season. A line of credit is intended for the second scenario and_ helps small businesses finance short-term working capital needs.
Pros and Cons
Getting a small business line of credit has a few positive and a few negatives. The pros are that you can have a line of credit that you can continuously borrow from when you need to and you don’t have_ to keep going back to the bank for more money. The cons are that you must pass a credit check and the line of credit may have a lower limit than you need.
How to Approach a Bank for a Line of Credit
To get a small business loan, you need to be smart about how you approach the bank to save their time and yours. First, you need to ensure that your business has positive cash flow and can prove it to the bank, according to the U.S. Small Business Administration. A bank will determine the maximum line of credit you qualify for by looking at your past and present revenue and cash flow. If your business is running in the black, you may not be able to secure a line of credit. The bank, of course_, wants to know that you can repay the amount you borrow. Also, if you have poor personal credit, make sure that your company’s credit is not tied to your personal credit. This will better ensure that you are approved for your line of credit. Generally, you should only take out a line of credit if you feel you can pay back the debt with profits during your regular operating cycle.