When we talk about the line of credit than a commercial line of credits is the most
famous and misunderstood funding technique to your startup. Knowing about the
exact working of the commercial line of credits for your small business is very
important. This will give you the idea that a business line of credit is a food
step for your type of business or not. In this article, we are going to tell
you guys about all the workings of the Commercial line of credits that you need to know.
The correct usage of the line of credits
This is
a financing solution that helps your company to withdraw a predetermined
amount. You just need to make a simple request to draw money from the line of
credit. The best thing about this credit is that you can pay it back at any
time. These line of credits mostly works like the conventional credit card. If
you get approved for the line of credit lets suppose 100,000$ but you only need
10,000$ to pay some recent bill. You can draw only 10,000$ at that time to pay
off that expense.
You have to keep in mind that the commercial
line of credits can only be used for your business purposes. These purposes can
include handling cooperate expenses, covering payrolls or getting new equipment
for the business. You cannot use this fund for your personal use. The amount
you get for your line of credit depends upon the size of your company and the
risk you are willing to take. This line fee will be repaid in the form of an
outstanding balance on your business account. Depending on your lender some
time you also have to pay maintenance charges as well for the line of credit.
Line of credit types
There are two basic lines of credits in which
this financing term is distributed.
1. A secured line of credits
It is a type of line in which the borrower has
to put some assets or real estate as collateral to secure the amount of the
lender. If you are unable to pay back the amount the law allows the lender to
foreclose the assets of the borrowers.
There are different types of collateral that
you can put against the commercial lines of credit like machinery, cash,
inventory and many more. Banks file the UCC lien if a person is unable to repay
its loan.
2. An unsecured line of credits
In this type of commercial line of credit, you
don't need to put any asset as collateral. You get this line of credit on your
credit score history and market reputation. These lines of credits are given to
you on the personal guarantee of the business owner. If the company is unable
to pay back the lenders have the right to sue the company.
Qualification rules for A commercial line of credits
You have to keep in
mind that qualifying for a commercial line of credit is not that easy and there
is a long criterion that you have to follow to get one. There are three C,s
involved in the guarantee on which the lenders provide you with a line of
credit and that’s are Cash flow of your business, collateral that you are
putting against it and credit score of your account.
How SBA help you
The first thing to
qualify for the commercial line of credit you can do is to qualify for an SBA Loan. SBA backs multiple loans offered for small businesses and it acts as a
guarantor on your behalf. This way you can qualify faster to get a commercial
line of credit at low APR rates.
Company assets play a good role
Company assets and
annual income is another important feature that helps you qualify for the line
of credits. If you have excessive assets and also annual revenue is good then
lenders can feel a guarantee that you will repay the amount. There are different
requirements that vary from lenders to lenders.
Your financial ratio
Banks and other lenders
also, review your financial ration before they give you a line of credit. There
are multiple things that lenders review before approving your application and
they are follows.
● Debt service
coverage ratio
● Fixed-charge
coverage ratio
● Current ratio
●
Other ratios of your income.
Guarantees that you can provide for a line of credit
There are two types of
Guarantees that you can provide if you are getting an unsecured line of credit.
- Personal
Guarantee
- Corporate
Guarantee
Credit research and background
These lines of credits are given to you on the
personal guarantee of the business owner. If the company is unable to pay back
the lenders have the right to sue the company.
The banks do a precise background check on the borrower’s credit history
and its credit score. They can also interview your company manager or other
employees as well.
Loan covenants
These lines of credits
have
different types of covenants. Covenants mean different rules and regulations
that a company has to follow to get the required line of credit. These
conditions vary from lenders to lenders but the most common covenants are
followed.
●
The lender can ask you to keep a minimum net
worth
●
Your company has to disclose all the current
accounts, inventory, and assets.
●
If you are unable to pay back the bank can file
a judgment without going through a trial.
●
You have to provide a liquidity ratio for the
company.
Pros and Cons of Commercial line
of credits
Pros
|
Cons
|
They can improve your cash flow quickly
|
They are hard to get
|
They can be flexible as long as you don’t reach the limit
|
They are not an option for startups or companies with
less than two
|
You can pay important expenses at the time of emergency
|
years of trading history
|
They are cheaper than most alternative solutions
|
Covenants can be hard to meet
|
Once you reach the limit, it’s hard to increase it quickly
|
So here are all the details that you guys need to know before you apply for the commercial line of credits to support your business. You can also apply for them online at BitXfunding.
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