Building an eco business is one thing like the guys above from Havie have done. But dealing with the business and structuring it in line with your values, is another. Maybe you are working on microfinancing, or donations but most untraditional or novel businesses stll have to think traditionally when it comes to the bottom line of financing and credit. A business line of credit is a different kind of loan offered to businesses, and it works kind of like a credit card: you can withdraw as much as you need from the loan account as long as you don’t exceed the limit offered to you, and you only pay interest on the amount you actually borrow.
This kind of loan offers businesses a way to smooth out spikes in revenue and expenses, giving them some working capital they can borrow as they need it. Not all businesses can, nor should, apply for a business line of credit.
How Long Have You Been in Business?
Banks and financial institutions that initiate lines of credit want to see that you are an established business. The preference is that you have been in business for a few years. However, many online lenders or banks are okay with you having been in business a shorter amount of time, as long as you have strong revenue.
When showing how long you have been in business, keep in mind that if you have changed business names, the state where you are incorporated, or other information, you may have been in business longer than you have had your current name or location. Share those things with your financial institution as that may influence your eligibility and your interest rate.
How Much Consistent Revenue Do You Have?
The other thing banks and lenders like to see is strong revenue. This is why being in business longer helps, but as long as you have at least $25,000 in revenue annually, you may qualify for at least a small line of credit. Your interest rate may be higher though, so you will need to be careful about what you borrow.
The same thing goes for revenue as does your time in business: be sure you are showing all of your revenue, even if you have income from multiple sources. The better picture the institution gets of your revenue, the higher line of credit and the lower interest rate they will offer you.
Consistency is another key. If you have not received consistent revenue, it may be harder to qualify. If you are a new business, you may have to settle for lower limits until you are more established.
Do You Have All of Your Documentation?
The biggest thing you need to prove is how long you have been in business, and what revenue you have coming in. This means you will need documentation of those things. You will need:
Incorporation Documents or LLC Establishment
- Personal Tax Returns
- Business Tax Returns
- Business Income Statements
- Profit and Loss Statement
- Balance Sheet
These should be pretty standard items and pretty easy for you to provide, but be sure that you have them gathered and ready before you apply to make the process faster. Also, contact the institution ahead of time to see if they have any specific requirements for a business line of credit so that you are prepared.
Is Your Accounting Up to Date?
One of the keys to providing all of the documentation you will need is that your accounting needs to be up to date. It should be anyway, but just like at the end of the year and tax time, it is especially important when you are applying for a loan.
Revenue, expenses, gross profit, net profit, and current balances on all of your accounts are important elements to getting a loan. It also gives you a good picture of your financial situation and how much you need to borrow both short and long term.
Are You Ready for a Line of Credit?
Besides the question of if you can apply for a business credit line is the question of if you should at all. Here are a few key things to ask yourself:
- Can you be disciplined with credit?
- Can you keep yourself from borrowing more than you need?
- Do you have the revenue to consistently make payments?
- Do you have varying expenses a line of credit might help with?
- Will a business line of credit help you expand and grow your business?
If the answer to these questions is yes, you are ready to apply for a business line of credit.
A business line of credit can be a real advantage to your business. It can help you smooth out spikes in income and revenue, providing you with working capital when you need it. Just be sure that you have been in business long enough, have sufficient revenue, and have all of the documentation and accounting you need to apply ready.
Then use your line of credit wisely, and your business will benefit greatly in the long term.
Are you thinking of applying for a business line of credit? If so, what would you use your new source of funds for? Leave us a comment in the section below.