A business line of credit is one of the financing lifelines that help entrepreneurs continue to operate during tough times. It helps you meet your obligations to clients, suppliers and employees not only when business is slower than usual; but while you are still in the process of determining its viability in the marketplace.
Credit card feature
It works like a credit card for businesses, allowing you to draw down the balance whenever you need access to funds. So, unlike other types of loans, you will only pay down interest on the portion of capital that you are actually spending. If you took a $200,000 line of credit but you realized that you do not need all the capital upfront, you can simply withdraw the required amount.
Unlike traditional loans, a business line of credit is easy to obtain, even for startups with small capitalization. But, not everyone can qualify for traditional business loans offered by most banks.
To get approved for this type of loan, you need to prove that –
- Your business has been in operation for at least two years
- You have substantial collateral that secures the debt. In the event you default, the bank can take possession of the asset you used as collateral and sell it to recover some or the entire amount you originally borrowed. By providing collateral, you are granting your creditor a bundle of rights to such property. But, it does not mean that the creditor can no longer run after you in case of default. If after the sale of your asset the amount raised did not satisfy the full amount of debt, the lender can apply for deficiency judgment against you for the remaining balance. So, it is important to choose a lending institution that offers a sound repayment plan to avoid the repercussions of defaults.
- There are co-makers who will make personal guarantees you can access business line of credit.
It also helps if you have good credit, which could refute assumptions that your business is failing or that you may not be able to make repayments on time or would ultimately file for bankruptcy.
For this reason, ALC Commercial simplified the eligibility criteria to provide financing opportunities for small scale entrepreneurs who may not qualify for traditional credit. It basic eligibility criteria provide average consumers to access business line of credit without the heavy documentary requirements required by traditional banks and lending companies.
Benefits of Line of Credit
As small businesses are given more flexibility in financing, entrepreneurs can look at the positive side of obtaining this type of credit.
- Line of credit for business provides low interest. You will have a pre-approved credit limit that is usually higher than the amount credit card can offer. It is because this type of credit has lower risks to the lender because of the collateral. It’s unique “interest-per withdrawal” feature also allows you to pay for the interest of the amount you used up. For example, if you were granted with If $200,000 limit, but you decided to withdraw $50,000 for the time being, you will only pay the interest on the said amount. Supposing you take out additional $50,000 after a month, you will pay interest on the total amount of $100,000. IT is only when you fully consumed your credit limit that you will pay an interest for the full amount of $200,000.
- Entrepreneurs are challenged to keep up with their business plans and to strategize business growth. While ALC Commercial may not be very strict with the traditional documents that most banks require, it is still advisable to prepare your business plan.
- Most of the lending companies require a well-developed business prospectus with a loan amortization table, well-laid out profit and loss statements, balance sheets and other relevant financial documents. Your business plan is a tool that will guide you in navigating your business to the right direction. It will also serve as a tangible reminder why you started your business in the first place, and how you envision it to become in the coming years.
- You have tremendous control over how you can use your borrowed funds. If you want to see an exponential growth in your business within a short period of time, “Financial Leverage” is the key. Use your borrowed funds to increase the rate of return on your equity. Make sure that you implement strategies that could produce ROIs that are higher than the interest on your debt.
There are many factors to consider when applying for business line of credit, from the eligibility requirements to the terms of credit. So, it is vital to find the right financial company that will walk you through the whole process and to provide solid advice to lead you to the right direction.