When you are deciding whether or not your company needs a business line of credit, the first thing you should determine is how much your business can safely borrow. In order to do this, you should review your cash flow analysis to see the amount of principal that can be repaid on an ongoing basis if it is required by your lending institution.
In some cases, a principal repayment does not need to be made on a monthly basis as it relates to your business line of credit. Instead, at the end of the credit facility, the outstanding principal balance is converted into a loan and regular payments of interest are made.
However, this methodology is becoming somewhat antiquated as banks are taking fewer risks when it comes to the extension of credit. Now, you will most likely be required to immediately repay any outstanding balance once the term of the credit line is complete.
When you are obtaining a business line of credit, you are going to need to have a business plan that showcases to the financial institution that your company can handle a specific amount of debt. Your banker is going to be most interested in your balance sheet as well as your cash flow analysis.
Prior to visiting a financial institution, you should work with your certified public accountant to determine the metrics that will be used by the bank when they are considering your business line of credit request. Additionally, your accountant and business adviser can assist you in putting together the credit request application that you will need when you are discussing your capital needs.
One of the most important things that you should discuss in your credit application and your business plan is how you intend to use these funds. This is one of the most crucial factors as the bank is going to want to see that a good portion of your line of credit it for tangible asset purchases. A smaller portion of the facility can be geared towards working capital purposes or for ongoing inventory needs.
In closing, obtaining a business line of credit is a difficult process that will require a full examination of your business as well as your personal financial situation. You are always going to be required to provide a substantial personal guarantee, including your primary residence and vehicles, as it relates to undertaking this type of debt. As such, and with any business decision, you should carefully review the benefits and risks that are associated with using a business line of credit.
