Business lines of credit are an essential source of financing for small businesses. However, they’re also complicated to understand and apply for. This article explains the basics behind business lines of credit and how to find the right one for your company based on your needs.
When looking for unsecured business lines of credit for startups, it’s crucial to find a lender that has been in business for a long time and has a good reputation for customer service. It also helps if they’re local so you can visit them in person when you have questions or concerns.
Debt-to-income ratio is the percentage of your gross monthly income that goes toward paying your debt obligations. It is used to determine if you can afford the loan. In other words, it’s a measure of how much you owe compared to how much you earn. Anything above 40% is considered high risk, and anything below 30% is considered low risk.
Cash flow is the amount of money available to pay your bills. In other words, it’s the difference between how much money you make and how much you spend.
Cash flow is not always the same as profit. For example, if you sell a product at $10 and only pay $5, your cash flow would be -$5 (you have negative cash flow). However, if you sell a product at $10 but only need to pay $7 because someone gave you credit, then your profit would still be $3 (but this time positive), but still negative since you paid out more than what was received (again -$3). This means that some businesses can have positive profits but still have negative cash flows due to their expenses being higher than their revenues.
You need to know your credit score before you go into the application process. You will have to provide it when you submit your application, and it will be used as a part of their decision-making process. If you have a good credit score, then you will likely get a better interest rate than if your score is poor or non-existent.
If you have no credit history, this can be an issue because they want to see that borrowers make payments like clockwork on average over time. If they do not know how responsible someone is when paying back debts and obligations, then they cannot be sure that they won’t default on the line of credit once approved by them.
When you apply for a business line of credit, the lender will look at your credit history and assets. One of those assets is collateral. Collateral is something of value that can be taken if you don’t pay back the loan or meet other obligations, such as paying off insurance premiums or rent.
The lender can sell the collateral to offset losses if they decide to repossess it and sell it at auction after giving notice in advance.
As per Lantern by SoFi, “With both types of small business lines of credit — unsecured or secured — you are approved for a maximum amount of funds.”
A business line of credit can be an excellent tool for growing your business, but it’s essential to take the time to do your research and find the right lender. We recommend seeking out local lenders with experience working with businesses like yours and other financial institutions with good reputations in your community.