Business Line of Credit

Business lines of credit provide an approved borrowing limit, supplying funding that can be used for a variety of business expenses such as working capital, leasehold improvements, capital expenditures, and equipment or inventory purchases. One benefit of an approved line of credit is that it establishes a potential long-term relationship with a bank. This ongoing relationship not only gives a small business a source of growth capital, but it also lets an owner access the financial expertise and advice of their local banker, and the banker's contacts within the business community. Business lines of credit also benefit a small business by their flexibility; an owner can borrow in small or large increments, as needed, for financing small business expenditures as they come along. A bank line of credit lets a small business owner plan ahead and focus on growing their enterprise, while providing the security that if growth capital is needed, the borrowing capability to cover that need is already in place.

What are the Pros of Bank Business Lines of Credit?

Having a line of credit approved when business is good lets an owner establish their relationship and repayment history with a particular bank. During a slow period, it can prove invaluable to have the borrowing power to push through until sales increase, or outstanding accounts receivables are in hand. Most business lines of credit are unsecured; this puts a small business owner at less risk of losing a home or other personal assets in a worst case scenario. Because a small business owner doesn't have to draw out the entire credit limit at one time, interest is payable only on the amount borrowed. This represents cash savings and is especially favorable when compared to other types of small business loans. The length of time that a business line of credit can be maintained also makes it an attractive funding option for a small business; typically, lines of credit aren't established for a fixed term. When a borrowed balance is paid off, the credit line remains in place, and a small business owner has the option of borrowing again, as needed.

What are the Possible Cons of a Bank Business Line of Credit?

A bank usually requires that a small business has an established track record of success to qualify for a line of credit. Depending on the financial institution, this may equate to two or more years of operation and profitability. The application for a business line of credit typically requires financial documentation such as tax records, a balance sheet, and proof of the business's cash flow; updated submissions may be an annual requirement to maintain the credit line. This form of small business lending often carries fees that aren't associated with other funding options, such as credit cards and term loans. There could be a cost to establish the line of credit, as well as an annual maintenance fee, and possibly a set fee for every withdrawal. Another drawback is that interest rates on a line of credit can be somewhat higher than those charged on other types of small business loans.

How to Access a Business Line of Credit

Approaching a bank that a business owner has dealt with in the past, perhaps for a home mortgage, can be helpful when applying for a business line of credit. Most banks have a specific business borrowing application process. This typically includes completing an application form with pertinent details on the business location, history and basic financial information such as deposit accounts and outstanding debts, the requested credit limit, and a list of the of all owners with a 25% or more stake in the business. If a small business is opting for a secured line of credit, the bank will request details on the proffered collateral. Most banks require all listed owners to sign a personal guaranty as part of the application.

Additional documentation must be submitted along with the application, usually the business's financial statements for two full years of operation and/or Federal tax returns, as well as an interim statement for the current year's operation. Guarantors will also need to supply their personal tax returns for the previous two years, along with current personal financial statements. Applications are often processed quickly with this form of funding, and an owner may know in as little as two days that their line of credit has been approved. After this takes place, a small business owner should review the line of credit terms, preferably with their accountant, and if they're found acceptable, sign and return any required documents. Most banks provide a business customer with easy access to their credit line funds through personalized checks, online or telephone transfer requests, or in some instances, a credit card, ensuring that the line of credit is available whenever it's needed.