Search

Business Line of Credit - Learn All About It

Updated: Aug 29, 2021

Jenny is a hardworking businesswoman who has some cash flow difficulties. Short on cash, she called the bank just to hear that her loan request was denied. After hearing her loan requests denials, she became anxious and reached out to the bank. The loan officer on the phone told her to meet with the manager to talk about it in person. When she arrived at the meeting, they told her they couldn't provide a line of credit.



What is Jenny to do?


Definition of a Business Line of Credit (BLOC)


A line of credit is a loan agreement with your bank that enables you to borrow up to an agreed-upon limit set by the bank. It is a type of loan that can allow a company to cover their short-term obligations when they don't have enough cash.


It is often used for emergency expenses or for times when the company needs to make large purchases, but it can also be an excellent way to get a lower interest rate on its debt.


A-Line of Credit is created by the bank or lender and is often used as an instrument for small businesses or individuals to bridge short-term liquidity gaps. This type of loan has various features that make it more attractive than other types of loans because it provides access to funds at any time without having to apply again for another loan from the same lender.



Benefits of a Business Line of Credit


Lines of credit are types of loans that you can use whenever you want to.


Getting suitable small business loans is becoming increasingly important. When done correctly, a line of credit should come with competitive interest rates and allow you to avoid less favorable options like payday or title loans. Given this, it's always worth doing your research on any business loan before applying, but the pros do seem to outweigh the cons.


Easy access to Funding

When you have a business line of credit, you can access some or all the funds available to your business based on the credit limit.


Finance Equipment

Sooner or later, your business will need to upgrade the latest and greatest equipment to stay competitive. Or your business equipment is old, outdated, costly to repair, or needs to be replaced; what can you do? If nothing else, a business line of credit can help you get the right equipment coming your way, thus avoiding losing money in business productivity and opportunity cost.


Case Study:

Bobbi is a restaurant owner who needs to replace her old failing oven with a jet-air convection oven because her restaurant has been bustling. But she can't afford to because she's been struggling to pay for other business expenses.

The above leaves her with few options: she can borrow money from the bank at an interest rate of 19%, which will put her in even more debt, she can sell some of her things (cars? jewelry?) to get the money, or she can take out a line of credit from a business lender that could provide a line of credit with just a one-time fee and a competitive interest rate.


Bobbi decides to take out a line of credit from the business lender and is grateful to avoid paying high-interest rates and meet her business demand with a brand new oven.



Restock Inventory


You can restock your inventory to meet demand and keep customers coming back. Your business sells a product line that sells like hotcakes.


But it is a product you don't make, and it has a long lead time from your preferred supplier.


Having a business credit line can help you get ahead of the competition and have it ready and available to ship out to your customers, hence avoiding losing the cost of opportunity, right?


The business owner knows that he requires more inventory, but the business budget will not allow it. He is also finding that his customers are not satisfied with the wait time for their order to be fulfilled. They want the product now! So the owner decides to invest in a line of credit to increase their inventory and keep customers happy.

gif

The invested funds from the line of credit to increase inventory levels also increased sales and customer satisfaction.


Leverage

A business line of credit gives you leverage to negotiate better product pricing or deeper discounts with your vendors.


Expansion Projects

The business owner can invest the funds into an upcoming expansion project and give your company more exposure. A BLOC is ideal for businesses looking to expand their operations but does not have enough cash on hand.


The business owner is proud of the company's recent successes, but there is a caveat. The company has up to $80K in its bank account. A line of credit of up to $200K that the company can borrow against.



If the business owner invests in this expansion project, it may give his business more exposure, and if he profits from it, he will have more capital for later projects.





Renovations and Remodeling

Businesses can always use new ideas to stay ahead of the game. For example, the use of a business line of credit can provide an easy way to renovate or remodel your existing business place.


Businesses are constantly looking for ways to outdo their competition. Still, it's not always about bigger budgets - sometimes, what you need is creativity to come up with innovative solutions that will help bring some excitement into your company again!


Case Study:

The business owner of Best Shoes has a successful line of business, but he wants to compete with a larger retail shoe store. Unfortunately, they have been unsuccessful in attracting new customers because the store looks old and dingy.


The owner is thinking about taking a line of credit loan but is reluctant to use it because he is not sure if he can make the payments. After a conversation with his financial advisor, the owner realizes he can use the funds from a line of credit to do renovations which will attract new customers. The business owner is then able to borrow money for the project, renovates the store, and goes on to attract new clients and more business.



Open A New Location

You may have an idea that could grow your business with a brilliant and complementary strategy.


Case Study:

Alice is the owner of a small company. She currently has one location but is looking to expand. However, Alice is in the middle of negotiations for purchases and contracts that would make her company even more profitable. The talks are going well, and Alice needs to decide if she wants to proceed with the project.


Alice is proud of her company and has never attempted such a large project before. However, she's concerned that if she invests in it now, it will affect her ability to negotiate with others later. So Alice tries to find someone who can give her advice on what to do. She consults with her trusted financial advisor and decides to apply for a line of credit and move forward with the project.



The new location is an excellent opportunity for her son, who just finished college, to start working with her so he can gain experience, which he's been asking for since he graduated from school.




Operating Cash Flow Stabilization


Companies with a low cash flow could find themselves in a difficult situation if they have to hold large inventory for an extended period.


Businesses with a low cash flow (i.e., continually operating near, at, or even below zero) must make sure to plan for future orders. They can do this by using BLOCs to purchase items that have extended lead times.


Case Study

Jim, the CEO of ABC Company Inc., has been running the company for over three years. It's doing great in almost every aspect but one: cash flow. But, unfortunately, his company can't seem to get enough cash in the door to cover all its bills and expenses.


Jim got the idea to bring in money and get his company back on its feet again: a business line of credit.


Jim uses the funds to pay off some of their debts and other business expenses, giving him breathing room until his company can get back on track and improve its operating cash-flow situation.



To Consolidate Debt

A BLOC is a perfect solution for those looking to pay off or consolidate more expensive debt.

A (BLOC) offers an easy and efficient way for small businesses with financial needs to get their debts paid quickly without paying high interest rates on credit cards that they may be carrying around in their wallets or other types of debts.


Case Study:

An entrepreneur (Sara) has a struggling business and a high balance on her credit cards, which she can't pay off right away. She has four different credit cards with high interest that she uses for her business.

Her financial consultant advises her to open up a business line of credit to consolidate these cards, save money on interest rates, and pay off her loan faster. After consolidating her cards, she still has a balance that she can use for her business needs.




A comparison between secured and unsecured lines of credit


A secured line of credit is a way to get funds for your company. It works by asking the borrower to pledge their assets as collateral against the loan if they default on payments. Typically a lender will most likely accept inventory or accounts receivable if the business fails to pay off this type of loan. Usually, a lender will not ask for equipment or land as collateral.


Unsecured lines of credit are sure to be more difficult for both businesses and individuals. The lending institution assumes the greater risk in granting this type because none of your assets, personal or business, can be seized upon default. That is why it will take good personal credit or excellent business credentials and some history in generating revenue for the business, such as the last few bank statements and other documentation, to get approved.


A business line of credit: Advantages


Yes, a business line of credit can help you a lot if your company needs more money. It is like having an emergency fund for your company. It also puts you in control to borrow as much or as little as required.


And because it offers flexibility and revolving funds. Once approved, you can draw money when needed to support your company's needs without having to wait on approval from the bank.


With a business line of credit, you are charged interest only on the used amount. So, to illustrate, if your credit line is for $90,000 (which is average) and you drew down $45,000 from it, then you won't be paying any interest on the other half, only on the amount you took out.


Business Line of Credit: Disadvantages

Many banks and lenders will require much more information during the application process to approve a BLOC. As a result, it could have less flexible terms and lots of bureaucratic documentation to sign, have costly fees, or put the business into too much debt.


Paperwork And Metrics

You might also bring your accountant with you because many banks and lenders will be asking for a ton of documentation. We're talking Bank statements to start. Then they will take a closer look at the balance sheet, which covers all of the business fixed, financial, and intangible assets. Then, they will look at the liabilities, which include things that the company owes (known as payables) such as rent, wages, utilities, taxes, and other debts such as loans, for instance.


Financial Statements


The banks analyze the balance sheet, Income statement (aka profit and loss statement), and cash flow statement.


The Income statement will reveal all the sales revenues minus all the business expenses it took to arrive at the net income.


The Cash Flow statement paints an accurate picture of the business's financial health by showing how much inflows of cash the company makes through its operations, investment, and financings, such as business funding and the outflows of money utilized for business activities.






Disadvantages of Having to Depend on Banks


  • Business owners are not getting the Funding they need from banks.


  • Banks can take weeks to approve loans, and the interest rates are very high.


  • Banks are slow, expensive, and don't always understand your business.


  • Banks are too big to pay attention to your small business loan application.


  • Banks fail to serve the needs of small businesses and entrepreneurs because they have to follow a lot of complicated rules.



Where can you get approved for a business line of credit?


If you're running a business, one of the most important things is access to business funding. Luckily for many companies out there, it's not hard to find lenders that can provide unsecured loans with a line-of-credit limit as low as $10K and up into the 750K!


Qualifications for a business line of credit


Qualification for a BLOC will depend on the lender's terms, company size, and current business situation.


How Much Do I Qualify?


You answer a few questions about your company size, the purpose for the loan, and credit history- then your approval amount will be determined by your creditworthiness, the size of your company, how much money your company needs, and for what specific purpose.


How easy or difficult is it to get a business line of credit?


It depends on the lender's requirements; traditional banks have more strict guidelines than other private lenders. The best and most flexible business lines of credit will come from private lenders such as Financial Funding Networks, LLC, which compete with traditional banks while at the same time providing a more pleasant customer experience.


How Do I Use a Business Line of Credit?


It can be used to help you grow, expand, operate your business, upgrade equipment, increase inventory, or pay any business expense when cash flow is low.


What restrictions are there?


Depends on the business type and the lender, some industries are restricted, and some lenders have stringent requirements.


How does it work?


Business Line of Credit works like a personal credit card you get


Can a sole proprietor use it?


Yes, you can get a business line of credit if you are self-employed.


How much does it cost?


There is no set fee for the amount borrowed, and what percentage will be charged in interest varies from company to company.


Do I Need To Show My Financials?


To be approved for a business line of credit, you will need to submit financial statements and other documents.


Is It Better Than A Traditional Bank Loan?


It depends on your needs. For example, a business line of credit can be a better fit for people who need short-term financing than traditional loans, which require repayment in installments over a longer time frame.


How do I get started with a business line of credit?


The first step to getting started with a business line of credit is knowing why you need it. For example, you might need it for any of the reasons previously discussed, and you should also consult with a financial advisor before applying. Set yourself up for Success!



Note: You can access the youtube video version you can see it here:


19 views0 comments