December 5, 2017
If you are looking for a way to finance your start up, or an expansion of your currently running small business, a line of credit is the way to go. It is a great way to acquire funds to help your business take off. A line of credit is a financial arrangement between the lender and the borrower, by which the former sets a cap on the maximum amount the latter is eligible to borrow. The borrower can access the fund as and when required, using only as much money as needed, within that loan cap. It is better than a regular loan because you have to pay the interest for only the amount of money you spend. Moreover, you have access to your fund whenever you want and as much money as you need, as long as it is within the limit fixed. The amount that you can be allotted depends on the risk as well as your credit score. Here is what you have to do before you apply for a line of credit for your business
Have a clear business plan
Write down your business plan in proper details, which you will need to demonstrate how you aim to earn money from your business. Since there is rarely any guarantee that a startup or even a running small business will generate huge profits any time soon, your business plan will be of great use in explaining how you propose to make money. Make your business plan realistic because this will also help you work toward your goal.
Keep a good credit score
If you are starting a new business from the scratch, it will not have a credit score, therefore, it is your personal credit score that will determine if you are eligible for a line of credit or not and, even if you are, how much is the upper limit that you can be given. If you have low credit scores, you may get a lesser amount at your disposal, or higher rate of interest. Your application might be rejected altogether if your credit score is too low. Therefore, before applying make sure to check your credit report.
Apply for business credit card
Do some research into business credit cards and apply for one for your business. Get a credit card that offers a decent line of credit. Not only that, often credit cards also offer rewards like cash backs, gifts or airline miles which you can use. Before picking one, make sure you do a fair amount of study on different credit card companies, comparing their yearly fees and interest rates. It is crucial to read all the fine print to know about any hidden charges. Moreover, sometimes credit card companies increase the interest rates after an introductory period or in case you fail to make a payment on time. These hidden clauses are rarely mentioned explicitly and hence, you might lose quite a bit of money if you do not read the fine print.
Opt for an equity line of credit
Often it is difficult to get a traditional line of credit for a business which is just in its starting. Since there is no guarantee that you will make enough money to make all your payments, the bank might refuse to give you a traditional line of credit. This is because a new business is considered quite a high risk, unless backed by assurances. If you have been turned down for the traditional line of credit, you can try using the equity of your home as collateral. This is called an equity line of credit that might come of help in this scenario.
Use your line of credit wisely to start or expand your business. It is important to know that just because you have a fund available to borrow from, you shouldn’t spend it all up without earning enough first.
Stephen Marshall is a director of Be Basic CEO with extensive experience in marketing and financial services in Meridian, Idaho. His work has been featured and mentioned in a wide range of publication, including Tweak Your Biz, Mobile Business Insights, Social Nomics, Small Biz Club, Energy Central, Dzone, Biz Community, Blog Her and more.