A large number of businesses need to turn to loans to meet their day-to-day expenses. Running short on cash can make it difficult to pay the bills, which can put any business in trouble.
While there are plenty of loan options, in this article we are going to talk about business lines of credit.
Unlike other options, this one doesn’t ask for high credit scores nor does it keep you waiting for weeks to get approved. A credit score of 500 and above is what’s required and the time taken to get the loan approved is just 1 day in most cases. Almost all the banks offer this option and it is also very easy to apply for.
What Is Business Lines Of Credit?
It works in the same manner as credit cards. A specific amount of loan money is requested and upon approval, the business can draw from it anytime they want.
The good thing about this loan is that the interest rate is only paid when money is drawn. Normally, the interest rate is between 7% to 25% depending upon the money taken.
The maximum amount of money a business can apply for is $1 million and the minimum is $10,000, however this may change in some scenarios.
This is a good amount, but businesses need to be careful about the kind of money they actually withdraw as the more money you withdraw, the more interest you have to pay.
This loan is unlike other term loans which require to pay a lump sum amount. Business lines of credit can be reused and repaid as many times as a business wants to. However, all payments must be made on time.
Once the amount is paid back, the business can use the money again. So, the cycle never stops. However, it should be mentioned here that you should never count on loan money to run your business.
You should turn to a loan only in times of need and must work towards a permanent solution to sort your financial issues as the problem with loan money is that you have to constantly pay the interest which takes away from your profit.
But, let’s not take away from this loan as it can help you in times of needs.
The greatest benefit of this type of loan is that you only need to pay interest on the money that is drawn and capital is always available when needed.
Who Can Qualify For Business Lines Of Credit?
There are several factors that decide if a business is eligible to get this loan or not. These factors include credit history, revenue strength and the age of the business.
Moreover, since this is an unsecured loan (no collateral involved), you do not have to worry about any collateral which is a major reason why this loan is so popular. Due to no collateral there is little risk in this type of loan.
However, you need to meet a specific criteria to qualify for this loan.
- The first requirement is that the business must be at least 6+ months old (for smaller loan amounts).
- The annual revenue must be at least $50,000 (for smaller loan amounts).
- Credit score of 550 at least.
- The amount of loan you apply for depends on how long the business has been in existence and other such factors. Plus, in some cases, especially when the amount requested is high, some collateral may be asked for.
Documents Required By The Bank:
- Business Tax Returns
- Personal Tax Returns
- Balance Sheet
- Profit & Loss Statements
- Voided Business Check
- Bank Statements
- Credit Score
- Driver’s License
Some additional documents may also be requested based on your location and the amount of loan applied for.
Line of credit loans offer flexibility to businesses that have to deal with cash flow problems by letting them draw capital when needed.
According to finance experts Financial framework, “there are many ways that business owners, entrepreneurs and high-net-worth individuals can grow their wealth, but there are many responsibilities to consider. With smart planning, based on quality advice, you will be able to build, manage and grow your business, right up to the day you decide to leave”. Below are their top tips for businesses to stay financially savvy and setup for success:
1. Tax works best for the well-informed
It is important to know what your rights are, what your tax and compliance obligations are, what small business concessions are available, and what plan you should put in place for superannuation
2. Start with an audit and end up with a plan
Audit your business to properly outline your key strengths and areas for improvement. Examine profitability, cash flow and budgeting – supplying you with a business plan that maximises your value, improves your tax position, and allows for growth.
3. Build your new business with a strong financial framework
Setting up a successful new business requires planning and strategy, followed by a seamless roll-out. Benchmark your business against other businesses to see where you stand against your competitors – use this information to help you build and manage the most competitive, most successful business possible.