Lines of credit are a financing method that allows you to withdraw money from a predetermined amount. You pay interest on the funds you use, and once you repay the amount, you can use it again. This flexible funding lets you decide how and when you use it.

Uses for a Business Line of Credit

This finance option is not the best choice for significant, one-time purchases like machinery. Owners typically use them to supplement working capital during income fluctuations for situations like:

• Purchasing supplies or inventory
• Maintaining cash flow during seasonal lows
• Funding a marketing campaign
• Making payroll when revenue is down
• Repairing equipment

Qualifications for Lines of Credit

Obtaining financing can be challenging. Banks take on risk when they loan money. They need to see various requirements to assess the value of their investment.

• Lenders want to see sufficient revenue because it shows that you will make enough money to pay back your borrowed amount.
• They will also check your credit scores, both personal and business, to determine if you have a good repayment history.
• Often you will also need to provide collateral to back the loan. You can use real estate, inventory, equipment, or other assets to guarantee the amount you borrow.
• Financial institutions lend money more readily if you have at least two years of business history.

Conditions of a Line of Credit

Before you agree to a line of credit loan, make sure you understand the details of your contract with the lender. Pay attention to expenses, such as:

• Account set-up charges
• Annual fees
• Transaction fees
• Payment requirements regarding your balance
• Terms for when you can no longer access funds
• Interest rates on the borrowed amount

Find out if your lender has the right to call your loan at any time. If the bank calls your line of credit, you must pay the balance immediately. Ensure you prepare ahead of time, so your business isn’t dependent on the financing to stay in operation.

Covenants of Lines of Credit

Keeping your credit line requires that you use the funds within the covenants set by the bank. These rules place limitations on various aspects of your loan. For example:

• You may have to maintain specific financial ratios.
• You may have stipulations regarding its use.
• You may have to notify the bank of particular circumstances.
• You may need to pay off the entire balance at specified periods.