How to get a business line of credit for my small business?

How to get a business line of credit for my small business?

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If you are a business owner, odds are that you have, or will, face that moment when you will struggle to pay bills and salaries to employees. Lack of operating capital can result from a slow-paying client, bad debt, seasonal pike upward or a downturn. Nonetheless, when you’re out of capital, you’re out of business. Because as the old adage goes, in business, cash is king!

There are many types of capital available to businesses. One of the most flexible is a line of credit. This type of financing serves to balance out your cash-flow: you draw on it when needed so that your operations run smoothly without interruption. 

Among various business owners who applied for financing, a business line of credit is the third most popular type of financing option according to a report by the Federal Reserve. 

How to apply for a business line of credit?

If you’re asking yourself how to get a small business line of credit, here are some things to consider:

     1. Is your business qualified? 

The first thing you should do before applying is to make sure you meet the requirements in terms of (a) how long you’ve been in business, (b) credit score, (c) annual revenue, (d) outstanding debt, and (e) general business history. 

Banks offer lines of credit, but they also have a set of requirements:  

Lender

Banks

Online Lenders

Credit Unions

Credit Score

680+

500+

N/A

Years in Business

Two years

Six months

Three years

Annual Revenue

$250,000

$50,000

$100,000

 As shown above, traditional banks require a high bar to qualify; credit unions and online lenders can be more flexible. Talk with a lending specialist to find out what type and amount of credit you may qualify for. 

     2. Types of business credit lines available.

Before talking to a lending specialist, you should know what the types of credit are:

  • Home equity line of credit
  • Asset-backed line of credit
  • Revolving line of credit
  • Business credit card

All these types of business credit lines have benefits, depending on the nature of your business, the profit margins, the cashflows, and other factors.  

     3. Looking for lenders

Once you have understood how to get a line of credit for my business, it is time to decide who to get it with. The options are endless. There are banks, online direct lenders, online credit brokers, credit card issuers, and the SBA (Small Business Association) has many programs including CAPLines

     4. Complete the application

The most essential part of applying for a credit line is that you’ve selected a credit application with requirements you can meet.  

Most lenders and/or lending specialists that find appropriate lenders for you, all have online applications. To be prepared when you begin filling out the application, there are several documents and information you should have available, including:

  • EIN (Employer Identification Number)
  • Personal ID — like a driver’s license
  • Bank statements for the past three months
  • Common information about the business
  • A balance sheet with assets & liabilities
  • P&L statement with revenue and expenses
  • Both personal and business tax returns (if needed)

Final thoughts

If you want your business to flourish, then having a  financial safety net is a good idea. Remember that lending institutions typically lend to businesses that don’t need it, so the time to apply is when your business is doing well. If your business hits a downturn, you then have in place a quick-fix solution. But though a credit line can rescue your business in tough times, the best use of credit lines is to finance growth. Therefore, it is never too soon to begin thinking about how to get a line of credit for new businesses to be better positioned to have the cash for the unexpected, whether that be growth or rescue. 

5 Tips to Small Business Funding

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Money for small business

Many early-stage and sustaining businesses find themselves running into cash flow problems for a host of reasons throughout the company’s evolution. Perhaps they grew at a faster pace than their profits could support; perhaps they needed to invest in equipment or to hire new staff to service their growing customer base. Whatever the cause is, solving that issue is not just about securing cash flow financing, but securing the right type of financing. There is a strategy to assess your cash flow borrowing needs.

Often, young entrepreneurs often find a lending source and get so happy that they can solve their short term crisis, but they haven’t looked at the long-term impact.

The right financing can support unending growth, whereas the wrong financing deal could make matters worse.

Here are the 5 tips for cash-flow funding when considering business financing, as shared by a loan specialist at Franklin Merchant Capital.

What information should a small business look at to determine the best type of cash flow solution for them?  

The merchant must keep in mind the short and long term goals to determine what’s best for their business plan. For example, if they anticipate a slow season ahead, they should enroll in a long term plan freeing up operating capital per day. If a merchant anticipates a busy season ahead [with future receivables], but has short term project(s) now,  a merchant should get a short term funding program to keep the cost of money down; and potentially take advantage of pre-paying discounts.

Should a business have a certain profit margin to consider cash flow financing?

Obviously the better margins a business has allows them to turn a bigger profit from these working capital loans. Profit margins are key to determining if such loans would work for them. Using other people’s money, done correctly, allows a business to flourish.

Is cash flow funding limited to long term vs. short term?

No, it all depends on their proforma of future projects i.e. slow season, busy season or expected expansion spike. There are many types of programs that can be customized to their needs.

What can a business do on a daily bases to raise their profile in the eyes of a lender? 

Lenders like consistency and stability. So keep daily balances (showing in their bank statements) as high as possible; avoid negative day balances and non-sufficient funds status. This makes the business a stronger file. And investigate funding options long before you need them. Build the research into your business plan, and at that time take advice from professional funding specialists.

Should a business look to a big brand name lender, or a smaller boutique lender?

They each have their strengths. But for most small and growing businesses, a boutique firm provides more customization, working closely with the business to develop a viable solution for their needs. A large lender, on the other hand, tends to have a preset criterion that a business has to squeeze into.

Note that financing used correctly can provide cash-flow stability and sustainable growth. However, whatever financing you ultimately obtain comes with a cost. Many small businesses tend to wait until their cash-flow is desperate to act, and in doing so may make quick decisions that have not been properly vetted for the long-term health of the company. So be sure to make sure you’re not biting off something you can’t sustain. Evaluate your sales consistency, high and low seasons, your margins, your operating profit, your bottom line profit, and then talk with a seasoned boutique lender to assist you in crafting something that works for your business goals.

(originally posted in Entrepreneur Magazine)

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