As new businesses evolve, their financial needs change, too. Once they’ve made it through those rough early years of scrambling for seed money and start up money and are showing a positive cash flow, it’s time to obtain business lines of credit.
Banks will only grant business lines of credit to well-capitalized businesses with good collateral, but once acquired, they can make the difference between success and failure.
Business lines of credit are amazingly flexible, but come with immutable restrictions:
• They are to be used only for short-term needs, and never for major purchases like equipment or real estate.
• Business lines of credit must be paid back as soon as possible.
• Business lines of credit are typically granted for a year at a time, but can be renegotiated annually.
• Business lines of credit are required to be paid in full for a minimum of 30 or 60 days during each annual cycle.
Credit lines can be lifesavers when accounts payable temporarily exceed accounts receivable. A good example of this is purchasing seasonal inventory months before it will be sold. Another example of wise usage is bridging the gap while waiting months for payment on government contracts that require considerable investment.
Despite all the benefits, business lines of credit have some negatives. Banks almost always charge fees for start-up, transactions and annual usage. And they aren’t easy to obtain. Prepare to present an updated business plan and personal and business financial statements.