Top Things To Know About a Line of Credit
Securing credit for a new business is challenging. You need an established credit history to qualify for some loans. It’s more complicated than showing your business plan to your local banker, and then if they like it enough, they will lend you money.
You need authorization from an underwriter for most loans, and they can mandate strict requirements before the lender will consider forking over cash to a new business. If you qualify, lines of credit can help a new business keep its money flowing while establishing itself.
How It Works
A line of credit functions similarly to a credit card cash advance. You’re approved for a certain amount of funds, which allows you to withdraw that cash for all your business needs. Unlike a credit card, it is not as simple as going to the ATM and getting a cash advance. You need to go to your lender to withdraw the funds.
You can use this type of credit for a variety of purchases. However, you have to use something other than lines of credit for larger purchases for the company because of higher interest rates.
How To Qualify
Unlike a credit card, you must meet stricter cash flow, collateral and credit standards with this loan type. The lender will base your creditworthiness on your or the business’s credit.
Most lenders will require a business operating period of at least two years to qualify for a line of credit. A newer company may need to find an alternative to this loan program for a little while until it’s more established.
If you choose to use your credit history along with personal collateral, you may qualify for lines of credit despite your business’s time in operation. Receiving credit approval may require that you sign your home or other collateral over to the bank, so their risks are limited.
How It’s Kept
Even after you get a line of credit, your lender will continually determine if you’re still eligible. The bank outlines stipulations they require to keep your line of credit in your contract.
These requirements can include a variety of things. The bank will look into timely payments, the business’s cash flow, and how you use the credit line.
Obtaining a credit line for your business can help boost your cash flow if you qualify. Knowing what it takes to prepare can help your company’s chances of acquiring this type of credit.