Getting a Line of Credit for Your New Business

Many entrepreneurs require a new business line of credit to succeed. Although most experts agree that there are many factors, they also will concede that a business line of credit is often the most critical factor for business success. For example, to succeed a business must have a unique product or service and a competitive advantage in the marketplace. Also, competent management is essential and a business must have developed effective methods to identify and attract customers. A line of credit can serve to help in many different facets of a business.

Grow a Business

In most cases, you will be required to access capital to grow a business. Adding new customers often translates into higher operating costs. Servicing more customers may require additional employees, equipment, materials, inventory and facilities. A company must often pay its employees and vendors before collecting from its customers. For example, a new company may land a contract for goods and services with a national company. This company will not realize any cash from the contract until the contract is fulfilled. Often, contracts with larger companies provide for payment 30-90 days after delivery of goods and services. Therefore, a company must have sufficient cash to continue operations until it can collect from customers

Seasonal Businesses and Emergencies

Some businesses require lines of credit because they are seasonal. For example, a business that caters to winter sports or provides services for holiday shoppers fall into this category. These businesses require capital to continue operations during off seasons. Many small businesses use lines for credit for an emergency reserve. An unexpected emergency can be disastrous for a small business. For example, a small company may rely on one or two vehicles for most of its revenue. A major repair on a vehicle can be a financial crisis if the business lacks funds to address the problem. A line of credit is often used to address these types of needs.

Preparations for Securing a Line of Credit

Before approaching a lender for a line of credit do some preparation. Make sure you have an effective business plan and your financial information is in order. The business plan should give a history and description of your operations. It should include details of the products and services provided along with your marketing strategy. The plan needs to have information on the owners. It should also give details of their education, experience and accomplishments.

Collecting Necessary Documents

You will need three years of complete financial statements on the business. These statements should be prepared or reviewed by your accountant. The financial statements need to support your loan request. They should demonstrate that your business will have the capacity to make loan payments and repay the debt in full. If the purpose of the line of credit is to address seasonal cash flow shortages, the statements need to show enough resources to pay off loan during peak seasons. Lenders need assurance that the businesses will not use the temporary line for a source of permanent financing.