How Entrepreneurs Get Lines of Credit
If you are an entrepreneur with a stable business and in need of inexpensive financing, then a business line of credit may be for you. Many business owners, however, interested in this kind of financing tool, however, underestimate the difficulty of getting approved for lines of credit.
The reason it can be difficult to get one is because the lending institutions often have strict qualifying criteria. What they look for mainly, though, is a stellar credit history and strong cash flow. A firm also usually needs to show that it’s been in business for two years and that it’s profitable.
However, there are ways to skirt around these requirements, and you may need to if your business is relatively new. One way to do this, for instance, is to have the owner and the major shareholders, if there are any, to back the loan against their personal assets. This means, of course, that if the company defaults on the line of credit, then those individuals will be held liable for the balance.
Similar to a credit card, when you have business lines of credit, you extract funds against a set credit limit whenever you need it. When you don’t, the funds just stay in the account until you want to pull it any of out. A repayment plan, usually monthly, is also set up for the outstanding balance and the fees.
It’s also important to know that once you obtain a line of credit, the lending institution will typically require you to maintain certain covenants (restrictions) in order to keep the account active. Covenants often include meeting certain financial ratios, paying off the line of credit every so often, maintaining a minimum net worth and notifying the lender of any material changes that occur within the company.
An additional factor to keep in mind is that it can be difficult increasing the amount of the line of credit down the road. So, if your business is growing rapidly and you need funding to meet the challenge, then that could pose a problem. A good way around this is when you first apply and if you’re approved is to factor in this extra amount. That way you’ll have it when you need it.
Managing cash flow problems and other inconsistencies of a small business is part and parcel of being an entrepreneur. Reach out to us today to see if business lines of credit are a good choice for your specific business needs.