How a bank line of credit can help your business!
A bank line of credit can help business owners to run an efficient operation. Let’s assume that you want to increase your inventory for the holiday season and need $50,000. You can simply write a check or ask your banker to transfer $50,000 from your line of credit to your checking account. It’s simple and efficient.
Let’s talk about another example, as you increase your inventory for the holiday season, you will need to hire two temporary sales associates and need $10,000. As the example above, you can write a check or transfer the funds as you need.
What exactly is a bank line of credit? A bank line of credit is like a credit card with a lower interest rate. You simply make draws against your credit line. You pay interest only on the amount used and expected to make payment on the amount drawn.
Let’s say that your bank has approved a $100,000 line of credit and you have drawn a total of $60,000 as in above example:
$50,000 (inventory) + $10,000 (payroll) = $60,000
$100,000 (total line of credit) – $60,000 (amount used) = $40,000 (available line of credit)
Your line of credit is intended for short-term cash needs and your bank expects you to pay down of payoff your balance as your cash flow improves. As in the above example, once the holidays are over and your holidays inventory is turned to cash, you should pay off your balance. As you pay off your balance, your credit line will be available as you may have several occasions during the year to borrow on your line of credit.
Banks expect you to pay off your line of credit annually which means to bring your balance to zero for 30 days. This means that if you need to buy new equipment or expand your building, arrange a term loan for that specific need. Thus, do not use your line of credit for any investment in your business.
Most bank lines of credit require no collateral but may require a UCC filing on your business assets. Uniform Commercial Code (UCC) filing may be filed when a lender wants to secure their loan with company’s assets.
A bank line of credit can help you run an efficient operation and a profitable business. There is comfort knowing that you have funds available when you need it. It’s convenient that you know instant cash is ready by writing a check.
There are many banks that are willing to make loans and lines of credit to businesses. If your business has been profitable for the last couple of years, you need to take time and shop around to know a few things:
- Is your bank willing to approve your loan?
- Is your bank having several customers in your industry and do not want more customers?
- Is your loan package a bank-friendly package that meets all bank’s ratio requirements?
Big banks approved nearly 15% of all small business loan applications in December 2012, according to Biz2Credit Small Business Lending Index. It was the highest approval since 2011. Loan complications and quality of loan packages are two reasons among many that you need professionals such as finance consultants to package your loan. They know how to apply with the bank that is more likely to approve your loan request.
Please contact Sina Advisory Group if you would like assistance in preparing your loan package that gets you a line of credit or a loan to help your business.