Are you planning to get a line of credit for your business? Before you tap into this quick source of funds which is available to you anytime, take a step back and learn the right way of preparing for it so you can effectively use this source of funds to meet your business goals.

Business line of credit

If a financial institution grants you an access to a definite amount of financing, you will not pay interest until you tap into the funds. You can either secure it or not with collateral such as receivables or inventory. You can also repeatedly tap into the funds because it is a revolving credit.

For example, if you have been granted $50,000 line of credit and you took out $25,000, you can still access the remaining $25,000. The moment you pay back the $25,000 you can access the entire $50,000 again, without re-applying for a new line of credit.

Here are some steps to take when preparing for a line of credit.

  1. Write a business plan. What are you going to do with the proceeds of the loan? Include a profit plan in your business plan to ensure that the loan will boost the sales and increase the profits. There’s a good chance that your loan application will be approved when you show your lender that you have a reasonable proposition and a solid repayment plan. It also won’t hurt if you can show a little bit of research to back up your marketing strategies.

Include your name and that of your business, a description of your business and how you plan to generate profits.  Don’t forget the financial statements, your cash flow projections and P & L, as well as other financial documents that could support your application.

  1. Determine the right amount of loan that you can afford to repay. How much can you really afford to pay each month? Study the likely terms of the loan, calculate the amount of money you need to finance a project or a business activity, and the payment you can comfortably pay based on your financial status and projected profits.

How much you can actually get financing for is based on specific financial factors that lenders consider before they give you a loan. It’s because lenders are highly risk-averse and they don’t want to lose money by lending to someone who may not repay them pack or may make it hard for them to collect the borrowed amount.

So, lenders would like to see proof of your earnings for the past two years, the specific components of your overall income (yes that includes bonuses and commissions) and the type and amount of your existing debts. Even borrowers with good credit score may not qualify if they cannot show enough proof that they have sufficient income to make monthly repayments. Lenders also look beyond the credit score, they want to know the type of loan you took, and how much you owe to each of them.

Even if you can make a big down payment, they won’t stop right there. Creditors are interested in the source of your funds and some may even require legal documents and proof of alimony or monthly support that you are receiving.

  1. Research your loan options

Be careful when choosing between many lenders. Looking in to the types of loans is also worthy of your time. Research your options to make sure that you are dealing with credible sources.

Here are two things to look for when you are hunting for a good line of credit:

  1. Some people say that the most important thing to think about when looking for a loan is the interest rate. Yes, you have to pay it eventually and a loan with a very high interest rate may put you in a bad credit situation, but you can always negotiate with a good lending agency. You can also ask for some adjustments. But once you deal with scam lenders, they might take away your money, assets and even steal your identity. Do your research and try to know how long they have been in the lending business and whether or not they received legal complaints because of incredulous lending practices.
  2. Loan terms. How much will you repay, all in all? You may be thinking about borrowing $100,000 when you only need $50,000. Sure, you can withdraw the $50,000 today and reserve the other $50,000 for emergency occasions. But is the loan amount impractical? Will it make you overly confident that you have an extra amount to run to when things don’t work out the way you want to?

Think about how the extra money will be used and whether it will be better for you to apply for a lower amount of credit limit or not.

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