When it comes to keeping their ventures running, small business owners often find lines of credit to be extremely helpful. How they work is sometimes a mystery, especially for entrepreneurs who’ve never used one before. Here’s a quick guide on why they’re useful, what you need to get one, and how to do so.
Advantages of Getting a Line of Credit
Funding your venture with a line of credit comes with certain advantages. In comparison to traditional loans, their interest rates, as well as closing costs, tend to be much lower. They’re also extremely flexible. In other words, the money you require will be available the moment you need it, and you’ll only pay for funds you withdraw. These qualities make them particularly suitable for smaller operations.
Requirements for Getting a Line of Credit
Not every business owner qualifies for a line of credit. To secure one in your business name, you need a decent credit score. Although the requirements vary, the odds are you’ll need a score of 600 or better. Further, you need to have been in operation for at least half a year, although two years is preferable. You’ll likely be asked to provide proof of your financial health, such as a balance sheet or a profit and loss statement. Additionally, lenders will be interested in factors such as your debt to equity ratio. Be prepared to face these types of complex questions.
Applying for a Line of Credit
The best time to apply for a line of credit is before you need it. That way, you’ll be prepared for whatever financial difficulty comes your way. Once you have determined that your credit is healthy enough for approval, gather all documentation. Make sure you have everything, including tax returns, bank statements, and articles of incorporation, easily accessible.
Next, it’s time to apply. Go to your lender’s website and complete the application process. Doing this may take no more than a few minutes. Alternatively, apply through a bank or credit union. Going this route requires that you contact a loan officer and schedule an appointment. Once your application is received, you’ll be notified that it’s under review. Nonbank lenders often take no more than a day to vet applications. Lines of credit from banks generally take longer to secure, so be patient.
Maintaining a healthy cash flow is vital to keeping every company afloat. For startups, a line of credit is often the best solution. Take advantage of this financial instrument so that your enterprise continues humming.