Entrepreneurs used to encounter financial difficulties frequently. The major operational issue any business owner may frequently encounter is related to cash flow, especially the credit demands and gaps between revenue realization and production capital needs. This is very critical in case of start-ups during earlier stages of functioning. Once the inventory has been purchased, then it becomes necessary to ride out the cycle and ultimately ensure that receivables have been fully collected.
Line of credit
It is a fact that without having sufficient working capital, there could be critical cash flow problems, which in turn leads to the most troublesome situations. It is a known fact that these sorts of cash flow issues have debilitated many business owners to even lock down their businesses. They are making money on just papers, but simply run out of any liquid cash in hand to survive.
The business lines of credit as short term business loans can accommodate all sorts of seasonal credit demands for your business by incorporating all ups and downs of the cash flow. Line of credit also empowers you to purchase and sell inventory in anticipation of potential future sales. You can discuss about the line of credit with your bank or financier at the beginning of the relationship itself so that they can also be prepared. The banks may not approve a line of credit immediately if you are just establishing a start-up firm.
Business line of credit is basically a standard financial support offered by banks and other financiers to serve medium to small size businesses. Getting the approval of such a loan depends on the business’ capability to repay the loan on behalf of the personal assets of a business owner.
Getting line of credit
Even though many firms are skeptical about offering a line of credit to the start-ups, there are many banks and private financiers offering a secured a line of credit to start-up ventures too. Such lines may be unsecured if the business has significant capability to demonstrate consistent profits, excellent capital, and reliable sources of repayment.
Traditionally, with line of credit financing, banks will set a specified maximum fund amount for which the users are permitted to draw as much they need. The borrowers have the option to repay and re-borrow during the agreed upon time, which is usually a year in case of normal line of credit. In addition to the basic details, the banks also want to know the alternative ways on how you are going to repay the line if the primary resource of payment does not work.
Some key facts to know about establishing a business line of credit are as follows;
- Mostly, the banks will not approve a line of credit to new ventures without personal guarantee or collateral.
- For partnership firms and corporations with multiple principals, the bank may prefer to collateralize the line of credit between all principals.
- You need to produce reasonable documents about financial performance, stability, and other documents to prove that you follow standard accounting practices to be eligible for a line of credit.
Unless you are well established, you need to provide pro forma cash flow documents which proves you capacity to make repayment. Pro forma income statements and balance sheets are the most common documents asked for.