Understanding Business Lines Of Credit

by : David Gass

Business Lines of credit are on-demand loans generally guaranteed by the lenders. The repayment is short term, ranging from six months to a year, and can be straight, fixed, or revolving in nature. Revolving lines of credit allow a company to borrow a particular amount for a particular period with no fixed payment terms. The cost for a revolving line of credit is based on an adjustable market-based interest rate. Straight lines of credit are short-term loans with a large payment paid at the end. Fixed lines are short-term loans with the payments based on the revenues from the company.

The Advantages
Business lines of credit are an excellent way to obtain extra funds when the company needs them, whether it is to meet seasonal inventory demands, remodeling of the office space, or any other short-term financial need. They provide necessary funds to complete a project or make it through a cash flow crunch. They help with payrolls, accounts receivables, accounts payables, short-term business expenses, and working capital. With this type of credit the company pays the interest for the outstanding monthly installment based on the funds used.

The Features
The personal credit rating no longer affects the company's transactions, and the personal assets are not kept as collateral. Owners often use their personal lines of credit to finance their company during the initial phase. Once the company gets through the initial phase it is advantageous to apply for a business line of credit. By establishing a Limited Liability Company (LLC) and getting an employer ID number, the owner can use the company assets as collateral to open a new business line of credit and separate the personal credit rating from that of the firm. They are generally based on the value of assets and hard assets are used as collateral. When applying, be ready with financial documentation such as income statements and tax returns.

The Uses
Business lines of credit are often more difficult to get than personal ones, but once you have it, the owner can leverage the buying and borrowing power. The amount loaned to the firm from them depends on the past business performance in terms of revenues and projected annual cash flows. A positive cash flow and the ability of the firm to repay debt on a regular monthly basis are essential factors in obtaining them.

Many financial institutions are in a race to lend, and offer attractive benefits. It is the responsibility of the business associates to decide which is best suited for them.

Additional Help
Software packages are available in the market, which ease the difficulty of preparing the financial position of a firm and assessing credit lines. This software is geared toward small as well as large businesses and is affordably priced.