Business Lines of Credit
It is one thing to strike up a great business idea; another to put that idea into a working business model; but it is quite another thing altogether trying to put all that ideas and models into practice. In short, an entrepreneur is only as good as his or her investment. Such is the way of all business ventures: a person has to shell out money in order to make money. Unfortunately, not everyone is blessed with a secure bank account where funds could be drawn at will, whenever, wherever. In other instances, the investment money is already laid down by the owner of the company, but during its run, more is needed to keep the business in operation. Here is where business lines of credit come in.
Business lines of credit are loans extended usually through formal lending establishments like banks and credit companies. These are short-term loans that may extend for one year or so; but often, business lines of credit policies mature within a few months. The duration of the loan depends on the agreement of the borrower and the lender, and the amount of the actual loan compared to the business’ earning power.
Often the lender makes a detailed study of the business in question, its operation and its potential earning capacity before forking over the financial resources. There is a rigid structure for comparing the company’s cash outflow, to its earning capacity; its past and present business growth, to its predicted growth and expansion; and the estimated amount of time it would take for the company to actually repay the loan. In the same vein, the company owner’s credit history is also taken into serious consideration.
It should be noted though, that not all business lines of credits are the same. There are multiple terms to choose from, and some lending establishments specialize in one term of business line of credit only. These terms are:
1. Asset-Based Lines of Credit are loans with that rely heavily on the earning capacity of the business in question. These loans are not particularly helpful for businesses that have not yet taken to solid ground. In other words, these loans are only for businesses that are currently active and have been earning profits for a longer period of time. This is a revolving line of credit that follows a strict formula regarding the company’s outstanding accounts receivables and its current inventory.
2. Demand Lines of Credit are called as such, because the lending companies often leave the loans “open.” In other words, these kinds of polices are not set by any maturity date. The loans continue to operate as long as the lending companies choose to leave it open, or if the borrower requests that the loan matures in due time. In which case, the lending companies have every right to “demand” payment from the borrowers whenever.
3. Revolving Lines of Credit are great especially for fledgling businesses. There is usually a prior written agreement between lending companies and borrowers for a set amount of time, where the borrowers can ask for financial assistance and repay them whenever possible. Say, in a span of 3 years, the borrower can ask for a series of loans amounting to $1,000 each infrequently. As long as that 3 year period is still running, the borrowers can continue asking for loans, and repaying them whenever possible. The lending company will not raise any issues until that 3 year period is up, and if there are still debts unaccounted for.
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