Small business owners with experience under their belts know that lean times will come. It’s inevitable. Being prepared in advance can bring a sense of calm to an otherwise unnerving financial drought.
For some, a business line of credit is a good solution.
Those with seasonal businesses are used to the significant changes in cash flow. During the down times, they can fall back on the LOC and then pay it off when the cash flows again during their peak times. And since they only pay interests on the funds they use, it makes it an affordable option.
Answer the following questions to see if a business line of credit is a good choice for you.
- What’s your business credit score?
In order to qualify, a lender will ask for the usual information; Annual revenue, how long you’ve been in business, collateral. Top of the list will be your business credit score.
Your personal credit score will be used if you don’t have a business credit score. And if it’s not-so-great, don’t assume you’re out of the game.
A Bad Credit Business Loan is still an option, though not without its downside: A lower credit limit, higher APR and stringent payment terms are less than ideal.
- What is your collateral?
A business line of credit can be secured with either business or personal assets. You may have machinery or equipment that could be liquidated in the event of a default. Real estate, business or personal, qualifies as collateral, too, however, for any personal assets like your home or land, your spouse must be a part of the legal paperwork.
- How much money will you need?
If the worst of the worst happened, how much would get you by? Smaller loans are easier to get, as not as much background documentation is needed to secure one. However, if a small loan won’t save you in a crisis, then maybe it’s not worth the time and expense to secure it.
A large credit limit is likely to require P&L statements, business tax returns and income statements and will be tougher for young businesses to obtain, as they’ve not had the time to set a track record.
For some less disciplined business owners, the temptation to use the money even when not truly needed may be too much for them to handle. Anyone falling into that category would have to set strict personal guidelines for usage.
- Are you comfortable with the APR and other fees?
The APR for your business line of credit will be determined by the age of your business, your annual revenue and your credit score. In the end, it could range anywhere from 6% to 35% or even higher.
There are usually up front fees to consider and transaction fees in the event that you use the funds. If yours is a variable interest rate, you’ll want to know from your lender how much the market rates will affect your payments.
- Will monthly payments be a struggle?
This may depend on your customers. If the majority of customers pay on time, you may not find your monthly Line of Credit payment to be difficult. But if you routinely deal with late paying customers, or have a customer that owes you a significant amount of money, monthly payments could become a financial stress.
- Is the LOC interest-only or maturity date?
For maturity date lines of credit, the balance is required by an assigned date or you can refinance. If you’re paying interest only, you’ll need to be prepared to repay the principal if you reach your credit limit so that you can borrow again.
How you handle your line of credit account can impact your credit score.