Business Line Of Credit & Working Capital Solutions Explained

 

Business Line of Credit

What is a Business line of credit?

A business line of credit gives you capital for a range of business needs. You ‘draw’ on the line of credit to give your business more working capital. This can be used for anything from buying stock and negotiating cash flow slowdowns to paying off debts or other emergencies and opportunities for your business. It’s essentially flexible financing.

Will I be accepted?

What sort of business you are effects what type of line of credit you can qualify for.

Broadly speaking a younger, not as well established business could be eligible for short term small business line of credit. On the other hand the medium to longer term credit lines are tailored more towards businesses with a good financial history and well managed financial planning.

Most clients meet the below criteria….

Business line fo credit - Bullets

 

How much business line of credit can I get?

In terms of how much funding is available, this depends upon your cash flow and forecasts and financial management history.

What documents do I need?

See the below list as an example of what may be required for an application…..

Business line of credit - Documents

How do business lines of credit work?

Surprises happen in business. Risk is nearly always involved. How can you plan and adapt to it?

Single unplanned events can set the progress of the entire business back.

Flexible Financing is a solution.

A business line of credit is a working capital solution that is similar to a personal line of credit that you may have on a credit card.

Put simply a bank or commercial lender makes a set amount of finance available to your business. You can draw on it whenever you need it.

It can be likened to a ‘pay as you go’ finance model because apart from some possible initial set up fees you don’t incur interest or payments until you actually draw and use the funds.

An example of a business line of credit.

A Business line of credit can be secured by collateral of some sort, sometimes a business’s property stock and accounts receivables etc. It could also be considered with your own personal guarantee.

Some people refer to business line of credit as ‘revolving credit’ because you can draw on it again and again.

So say as an example you were given £50,000 as line of credit for a small business and you decided to draw £40,000, keeping £10,000 in reserve.

When you pay back the £40,000 plus interest you have the whole £50,000 at your disposal again, ready to use for the agreed term.

How does a business line of credit compare to a normal fixed term loan?

Generally speaking the two suit different business needs. Business lines of credit work better when you’re encountering the ‘ad-hoc’ cash flow issues that businesses encounter whereas a fixed term is suited better to individual purchases and capital expenditure.

You can use a business line of credit for all business purchases too.

How does a business line of credit compare to a credit card?

Both of these could be described a flexible financing but there are a few important distinctions.

Credit cards tend to have higher interest rates.

If you need to withdraw cash or transfer a balance on a credit card you could be charged withdrawal fees.

Business lines of credit to help with cash flow.

As an example if it was bill paying time and you are still yet to receive what’s owed from your customer, you could potentially draw on your line or credit in order to cover your costs.

Let’s say the bills total £10,000 and you have a business line of credit that extends to £30,000.

If you withdraw the £10,000 in order to pay off your bills you only have to pay back the £10,000 plus the interest.

Also the interest only gets charged on the £10,000 withdrawn. Not the total £30,000 you have available to you.

Let’s say your interest rate on this is 10% per month. You pay back £11,000. Broken down to £10,000 plus £1,000 interest over a full year.

Once this is settled you can carry on drawing up to the maximum £30,000. Again you only pay interest in proportion to the amount borrowed.

What do I do next?

Overdrafts are not the only solution to working capital needs be they short term or seasonal or maybe your suppliers have changed their terms of trade or you have secured a new contract for which working capital is required and support with your cash flow.

Overdrafts are a good start however there are times when a separate facility is required for a specific contract or purchase particularly when dealing with overseas customers.

Letters of credit and import loans can help and with our extensive access to ‘whole of market’ lenders and funding providers via out broker contact we can support you through the process from start to finish.

All you need to do is to phone or complete the online enquiry form to set the ball rolling .

ShortForm Business Consultants Ltd (Company Number 10428423) provide consultancy services on behalf of Empire Commercial Finance Ltd (Company Number 08798534). We are not a Broker or Lender.