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Business Line of Credit
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Posted On: Monday December 29th, 2003 at 12:00am EST
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What kind of loan is most commonly used to provide working capital?
A Business Line of Credit (Line) is designed to meet the short-term working capital needs (inventory purchases or to pay operating expenses).
A Line is one of the most common forms of financing offered by financial institutions. Generally, collateral and loan guaranty are not required for approval, unless the applicant’s basic credit criteria is not met. If a business is in process of purchasing a fixed asset or obtaining permanent working capital (over one year), a Line will not be the best financial tool. Alternatively, a term loan would be the most preferred form of financing.
Amount
The amount of the Business Line of Credit (Line) will depend on the firm's historical and/or projected annual revenues and cash flow. A positive cash flow will be required. This means the firm has to be profitable and demonstrate that debt can be repaid on a regular basis.
The Line amount will be determined by the firm's total revenues and cash flow. If a firm's revenues are only $100,000, it will be difficult to qualify for a $100,000 line unless the firm projects increased revenues and cash flow. The firm may borrow up to the maximum amount approved. This may be done in one lump sum or incrementally.
Repayment Terms
A Line is generally revolving and therefore will have no fixed terms. Its first year repayment terms may require only monthly interest payments to be made.
Typically, a Line will require full payment (principle and interest) of the amount drawn prior to the maturity date.
The business may repay any amount borrowed and re-draw funds as needed without exceeding the authorized amount.
Collateral
Collateral, in general may not be required unless credit criteria is not met.
Financial Statements
Certified business and personal tax returns for the past three years, personal statement and other supplemental information are required for this type of financing. These documents should be ready prior to submission of an application. |
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