Managing a small business growth spurt is a challenging experience for business owners. Oftentimes an initial cash outlay is needed to take advantage of growth opportunities—whether it’s increasing manufacturing, hiring more employees, or investing in new ideas and new products. While company growth is a good thing, the popular aphorism “it takes money to make money” still rings true.
In order to finance growth, many business owners turn to a business line of credit to help them through inevitable financial pains that can be a result of quick company growth.
A business line of credit is a pre-approved sum of money offered by a bank that can be drawn from when needed. It offers a few noticeable advantages to small businesses over using credit cards or other types of financing. First, a business line of credit will usually offer much lower interest rates than a credit card will. Secondly, it offers the benefit of being able to access cash when you need it, making it easier to borrow smaller amounts of money and avoid paying interest on a large lump sum like you would with a traditional business loan.
It’s important to start the process of getting approved for a business line of credit before you actually need it. Like applying for a business loan, a business line of credit requires putting together both financial documentation and a business plan for how the funds will be used. To get started, you’ll need to compile all of the documents that the bank needs to review, including:
Depending on how long you’ve been in business and whether you’ve built up business credit, you may be asked for additional documentation—even personal financial documentation. Make sure to find out what other information you might need to submit so that you have plenty of time to prepare any additional financial reports that your bank may need.
Some business lines of credit are offered unsecured, meaning they don’t require any collateral from the person taking out the line of credit. If your business is relatively new and hasn’t had a long history of positive credit, you might be asked to put up collateral to secure a line of credit.
Collateral for a business line of credit can range from personal collateral (such as a vehicle or a home) to business assets that your company owns (commercial real estate, inventory, machinery or equipment, etc.). The type of collateral needed will depend largely on the amount of credit that you’re applying for, with larger sums requiring more substantial collateral.
Keep in mind that putting up collateral can help you get a better interest rate, since it lowers the risk of lending for the bank. However, make sure that you will be able to make payments on your line of credit, since defaulting could cause you to lose your collateral.
Having financial documentation prepared and collateral ready is a good first step, but you’ll also need to provide a detailed plan of how you will use a business line of credit to finance your company’s growth. Having a business plan that outlines the individual steps you plan to take, as well as how much and how quickly you anticipate revenues to grow can help a bank better understand how you will use the money and determine the likelihood of you paying back money borrowed.