Written by: Mathew Hein, Director of Business Banking, Firstrust Bank
Business owners will tell you that cash flow is the lifeblood of any company. And most commonly, a business line of credit from a bank is the IV that keeps that lifeblood flowing. This financial tool is used by even the healthiest of businesses to provide a needed cash infusion to support the growing needs of a thriving business.
Whether you’re looking to grow your business, bring in seasonal employees, or just have the peace of mind that comes with having a safety net of cash at your fingertips, a business line of credit can be a critical part of your business plan.
When seeking a line of credit, you’ll want to make sure you ask these important questions:
Similar to a personal loan, the amount of your line of credit should depend on your business need, ability to repay and collateral. If you are just starting out and have a history of charging and carrying a balance on a business credit card, then use that as a guide. A business line will have a much lower interest rate than a credit card, so planning to transfer that balance is a good first step. If you are planning to expand, make sure the line will meet your business needs over the next 2-3 years. Remember - you only pay interest on the outstanding balance, so having the flexibility of a higher line can be helpful if your growth exceeds your expectations. If you plan to use your line of credit to fund your collections, calculate your necessary line of credit limit by the following: accounts receivable days on hand divided by 360 days. The result is a good indicator of the ‘percentage of revenue’ you should have in a line of credit limit.
The application and review process and decision time varies by financial institution and situation. For a business line of credit it can vary from 24 hours to a few days based upon the size and complexity of your request along with the level of approval required. A direct lender that makes all its decisions locally is best suited for quick turnaround times with less red tape.
You should be able to access your credit line without red tape and lengthy delays. Most businesses find having online access allows them to easily move money from the credit line into their operating accounts. This both streamlines the process and simplifies accounting. While you might have different needs, you want to make sure your line of credit is easily accessible for you.
You’ll want a lender who tailors your line of credit specifically based on your company’s needs. Each business runs a bit differently and your lender should fully understand yours. For example, how often do you collect your accounts receivable? Cyclicality versus seasonality is important to consider when setting up your repayment schedule. What will you use the credit line for? In some cases, there might be a better source of capital, like a term loan. If your lender isn’t asking these questions, it’s probably because they have a “one size fits all” approach that doesn’t consider your individual business goals.
You’ll need to understand the terms and conditions of your line of credit agreement, especially the repayment requirements. There are many ways to structure the repayment of a line of credit. For example, will you make interest-only payments each month or will you pay principal and interest? Will you be charged a fee for not using the line of credit? These terms can vary by lender - sometimes greatly - so you’ll want to make sure your lender can explain it clearly.
6. Will the lender be there for me in the long run? A good lender has the capability and capacity to support you. They also follow up and are there for you when your needs change. Most businesses will have to deal with change, whether it be a shift in focus, surviving a lean time, or just adapting to an evolving marketplace. You’ll want a lender that assigns a dedicated relationship manager to you, who really knows your goals and has the time and resources to help you achieve them.