Business Lines of Credit

What type of credit does your small business use? When starting out, many new business owners use their own personal credit to finance the initial phases of their organization, either in the form of home equity, personal loans, or credit cards. However, once the new company has survived and made it through to some semblance of firm footing, it would be to your great advantage to begin to grow your business's own credit history. One of the most efficient ways of doing this is with the use of a business line of credit. A line of credit will not only help your company to develop a strong credit history, it will also give your business the financial flexibility necessary to meet unscheduled or unpredictable short-term cash flow demands. For instance, if you need extra funds for seasonal inventory changes, an office or equipment renovation, or to replace the transmission in the company's van, a business line of credit can be used to provide the supplemental cash.

Like a credit card, a business line of credit is an open-ended account. In other words, once credit has been extended, you may use the money continuously. Each time you repay the funds, they're available again for you to spend – but always only up to the amount of your credit limit. The interest that you're charged is based on your outstanding monthly balance.

While business lines of credit are typically more difficult to obtain than personal- or home equity lines of credit (HELOCs), the leveraging and buying power that they afford a business make them well worth the additional effort. Having a business line of credit also allows the business owner to keep his or her own personal credit and assets off the business transaction table. Furthermore, by structuring the business as a limited liability company, the owner can completely eliminate personal financial exposure, using only company assets as collateral to obtain the business line of credit.

If your business is brand new, you'll probably have to accomplish a few preliminary steps before a lender will grant you a business line of credit. First, you'll need to make sure that you've obtained all the necessary business licenses, registrations, and permits required by your local and state governments. You should also get an Employer Identification Number (also known as a Federal Tax ID Number), which is akin to a Social Security number for businesses. Then, register your company with a few business credit organizations (such as Dun & Bradstreet and the business divisions of Equifax, Experian, and TransUnion) and carefully follow their instructions. Once registered, you'll need to establish some form of credit with a few of the companies that you do business (for example, suppliers, advertisers, etc.). Now, take care of those accounts diligently! Pay your invoices in full and on time – if not earlier – every month, and make sure that those companies report your trade credit to the business credit bureaus. Most lenders like to see a solid and profitable financial history of eighteen- to twenty-four months, so continue to build and strength your credit file for at least that amount of time.

Once your business has established sound credentials, you're ready to apply for a business line of credit. Many owners take advantage of an existing banking relationship by seeking credit through the institution with which they have their personal accounts. This can often pay off for the business owner in the form of a lower interest rate on the line of credit.