Business Line of Credit Basics


If cash flow slows down during an off season, business owners may be concerned about keeping their operations running smoothly. Fortunately, a business line of credit can help.Many small businesses experience operating cycles with on and off seasons. If cash flow slows down during an off season, business owners may be concerned about keeping their operations running smoothly. Fortunately, a business line of credit can help.

According to the U.S. Small Business Administration (SBA.gov), “A business line of credit loan helps small businesses grow and operate. This type of loan is designed to finance short-term working capital needs, such as inventory purchases or to pay operating expenses. These loans are given by financial institutions to operating businesses that meet certain criteria.”

The basics:

  • To receive a line of credit loan, operating businesses must demonstrate a positive cash flow. The amount of the loan will depend on your business revenue performance.
  • The financial institution will look at past, present and future revenue and cash flow to determine the maximum line of credit your business will be able to borrow. The business owner needs to prove to the financial institution that the loan debt can be repaid during the term of the loan.
  • Once owners are approved for a maximum amount for lines of credit loans, they are allowed continuous borrowing and repaying throughout the term of the loan. This is why you may also see the loan referred to as a revolving line of credit.

If cash flow slows down during an off season, business owners may be concerned about keeping their operations running smoothly. Fortunately, a business line of credit can help.As previously mentioned, a business line of credit is appropriate for companies that have seasonal operating expenses or variable working capital demands. You would use this type of loan to purchase inventory and supplies – not for long-term investments like property or equipment.

In a recent Chron.com article, Kristie Lorette outlines the steps necessary to obtain a business line of credit. She also offers the following tips:

  • When putting together the data and financials for your business, be conservative and never try to make the numbers look better than they are. If you do this and have trouble making payments later on, it can harm your business credit history. Paint your business in the best light while keeping the numbers realistic.
  • Find out whether the interest rate on the line of credit is fixed or variable. If the interest rate is variable, make sure you understand which index the rate is based on.

If you understand all your options, acquiring money for your business will be much easier. With the right loan, your company can move forward into a profitable future. Contact us or stop by one of our banking centers today to learn more about how we can help.

 

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