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The primary difference between a Business LOC and a business loan is that with a credit line you can draw down the principal as needed rather than taking on a debt obligation as one lump sum. You only pay interest on the portion of the credit line that you have drawn down. Additionally, with a Business LOC you are able to repay the principal of the credit facility and reuse it again at a later time. A business line of credit works very similar to that of a credit card with the exception that it is to be used for business purposes rather than personal purchases.

Additionally, Business LOC facilities typically do not have a plastic card associated with their usage. In most situations, the borrower (you) are given a series of checks as if the credit line were a checking out with a finite balance. Each time that you need to drawn down the Business LOC you can write a check to a supplier, vendor, or to yourself (to be deposited into your operating account). This allows you tremendous flexibility when using a Business LOC.

In the case of a business loan, you are granted the full amount of the applied for credit once approved. In this case, you are required to pay interest on the full borrowed amount even if you are still waiting to use some of the debt proceeds. This is the benefit to a business line of credit versus a business loan. However, much like business loans, Business LOC can be applied for in a similar manner. The SBA has a number of programs that allow small business borrowers to acquire business lines of credit as if they were business loans.

If you do not intend to use all of the capital you require for one major purchase then using a Business LOC may be in your best interest. As we advise everyone, you should always speak to a qualified business accountant (who has a CPA designation) to determine which credit facility is most appropriate for you.

Not every business requires the usage of a <a rel=”nofollow” onclick=”javascript:pageTracker._trackPageview(‘/outgoing/article_exit_link’);” href=”http://www.businesloc.com”> business line of credit</a>. Some businesses produce more than enough cash flow to sustain the operations on an ongoing basis without needing to take on the liabilities associated with a credit facility. These businesses are most suited to take out a business LOC during times of expansion rather than financing the day to day operations of the business. For other businesses (such as large scale distribution firms, manufacturing companies, and other capital intensive businesses), a business loc may be the only way to conduct business. Below is an overview of the types of businesses that are most suited to use a credit facility:

Most Suited

Manufacturing Companies
Retail Businesses that carry extensive inventory
Wholesale Distributors with substantial inventory
Service firms that carry substantial amounts of accounts receivables
Medical Product Distributors
Pharmacies and Pharmaceutical Companies

Partially Suited

Firms that are undergoing a significant expansion over a set period of time
Companies that have irregular cash flows but regularly fixed cost expenses
Professional Service firms that receive government payments
Law Firms
Medical Practices and Allied Health Professional Practices

Ultimately, it is up to you to determine whether or not your business truly does need a business LOC. As always, you should speak to your accountant to determine your cash flow needs and whether the acquisition of a revolving credit facility is in your best interest. If you have additional questions whether or not your business is suitable for a business line of credit then you may also want to a specialty business advisor that has an extensive understanding of business credt.

When applying for a credit facility, you will most likely be required to have a well written business plan to showcase what you intend to do with the business loc. This may not be the case if you are using a home equity line of credit secured by your personal residence. If you are seeking to obtain a standard business line of credit then you will most certainly be required to have a business plan. BusinessLOC.com has a sample business plan outline that you can use to develop a plan that showcases how you intend to use the debt proceeds.

The key to a good business plan is to have a 25 to 45 page summary of your business, how you intend to use the capital sought, a description of the product/service you a selling, and a three year financial model that showcases you previous and anticipated profit and loss statements, cash flow analysis, balance sheet, and breakeven analysis. Again, these tools have been included for free by BusinessLOC.com.

If you are having significant trouble with writing your business plan then you may want to consider hiring a professional firm to assist you in this process. Often, business planning firms have extensive relationships with banks, finance companies, and private lenders that will be interested in your business project or established company. These firms may or may not take a success fee if they are able to secure a business loc for you. Prior to working with a business planning firm, you should check the credentials of the individual producing your business plan, make sure that they are registered with the Better Business Bureau, and that they have an established track record of obtaining credit facilities through their produced business plans.

Outside of obtaining the necessary financing that you need in order to launch or support your business operations, your business LOC also assists in establishing a credit profile for your corporation. As your business expands, you may need to acquire additional credit facilities or loans in the future. Much like a personal credit report, your corporation also develops a credit report. However, the credit reports related to business operations are typically provided by a company called Dunn and Bradstreet. By establishing a credit profile for your business, you will be able to expand your credit acquisition capacity over time. The mechanics of a business credit report versus that of a personal credit report are almost identical.

By establishing a business LOC, you also assist with developing an ongoing relationship with your banking or financial institution. Again, it is important to remember that banks want you business. Banks want to lend to you. Banks also want you to hold your deposits. By selecting a bank that can provide you with all of the necessary tools that you need to conduct business, you will become a valued customer. This is especially true if you conduct ongoing borrowing activities with the bank as this is their most profitable revenue center. Outside of fees, banks typically do not generate substantial income from managing money market accounts or checking accounts.

Additionally, with the strong demand among banks for new clients, many small business lines of credit (especially ones that come with a plastic card) offer significant rewards including free airline miles, cash back incentive programs, and other perks that you can use in conjunction with your business activities.

Despite the difficulties with obtaining credit in today’s economy, obtaining even a small line of credit may be in your business’ best interest. As you show your bank that you can effectively use a smaller line of credit – they will be more than happy to expand the underlying principal amount of the credit facility in the future.

Although not the most common method of acquiring startup capital, using a business LOC as financing to launch your business venture is not uncommon. As we have discussed in previous articles, there are a number of different method of financing your new business venture including using your own capital, raising money from private investors, or taking out a lump sum business loan.

However, using a business line of credit gives you more control over your business development. If you intend to build your business over a period of time then it may be to your advantage to use a business LOC versus as business loan. This allows you to only draw down the funds as needed, and you will only be required to pay interest on the portion of principal that you have drawn down. Although many new entrepreneurs seek to acquire all of the funds that they need via a traditional business loan, the flexibility of a business line of credit is often overlooked. When developing your business plan, you should entertain the concept of using a term based credit line rather than a business loan. Again, your accountant or financial advisor can assist you in making the proper determination of whether or not using a line of credit is more appropriate than a standard lump sum based credit facility.

One of the draw backs to using a business LOC as startup capital is the ever changing lending environment. Often, business lines of credit contain covenants that state that a bank can terminate the loan if certain business criteria are not met. These criteria can include depreciation of collateral, not producing enough positive cash flow, and changes in the credit quality of the borrower. However, with the recent passing of the credit reform act in 2010, regulations have begun to favor the small business borrower.

Much like a real estate brokerage, a loan brokerage can assist you in securing a business line of credit. These firms, much like any other type of brokerage, receive a fee for securing a business LOC on your behalf. However, like any industry, there are some unscrupulous people that work in this industry. It is important to note that you should avoid any loan brokerage that requires excessive fees before attempting to secure credit for your business. While it is not unreasonable to have some upfront fees before providing you with this service, you should always know how these fees will be used in conjunction with securing you with a business line of credit. When dealing with a loan brokerage you should make sure that any upfront fees are for acquiring credit reports or producing a business plan that will be used to show to banks and finance companies. Additionally, you should always verify the legitimacy of a loan brokerage by checking not only with your local Better Business Bureau but also with your state’s banking/finance regulatory agency. Please note that not every state requires that loan brokerage firms carry a specific license in order to render this service.

The fees for firms that specialize in securing business LOC can vary significantly, but they are typically on par of those with mortgage brokerage firms. However, since this is a specialized type of finance, the fees (on a percentage of the loan/credit amount basis) may be slightly higher as there is significantly more work to do than if they were securing you with a mortgage. As with any brokerage firm, the broker does not always work in your best interest. It is important to remember that the more that you pay for a credit line or loan – the more your broker is compensated. However, the primary benefit of working with a loan brokerage is that that usually have hundreds, if not thousands, of contacts in the small business financing industry. They also often have personal relationships with banks and bankers that specifically cater to small business financing needs. As such, they can very quickly introduce you to a number of interested lenders that may be able to provide you with proposals for a business LOC very quickly.

Loan brokerages can also be an invaluable source of advice when it comes to organizing the paperwork involved with securing business loans or other types of business credit. This is especially true if you are applying for an SBA backed loan as these programs have substantial and complex documents involved.

As discussed in our previous article, we discussed the usage of a business loan and how you ultimately repay your lender for providing you with lump sum financing. In this article, we are going to focus on the mechanics of using a business line of credit. This was touched on previous in our first article that showcased the pros and cons of using a business line of credit versus a traditional business loan.

Again, a business line of credit operates very similarly to that of a large credit card. You are often provided with checks from which to draw down the principal. With a business LOC you are typically only required to pay interest on the outstanding principal balance due. Business lines of credit operate on a finite timeline, and more likely than not, you will be required to make regular principal payments or the LOC will convert to a standard loan after the term of the credit facility is complete.

As such, you can calculate your anticipated payments at the close of the credit facility term. This can be simply done by knowing what the interest rate will be on the outstanding principal balance. BusinessLOC.com has developed an expansive number of MS Excel spreadsheets that you can use to determine the monthly payment that you will owe on the credit line (a monthly basis), as well as what the payments will be if the credit line is converted to a standard business loan at the end of the facility’s term. As always, if you should have any questions regarding the mechanics of a business line of credit or any other type of business credit facility then you should consult with a certified public accountant or business advisor to assist you in this process.

Often, entrepreneurs ask how a business LOC should be used. In previous articles we have primarily focused on the different types of business lines of credit and how they can be used in conjunction with startup operations of a business. However, in this article, we will shift our focus on how a business line of credit is usually used in the course of business for company that has been established. Typically, business LOC and other revolving credit facilities are used to finance the ongoing inventory purchases, payroll, and other short term needs of a business. The long term acquisition of financing equipment, real estate, and other large purchases is typically complete through the acquisition of traditional business loans or SBA backed loans.

The use a business line of credit for the development of a business is most appropriate for businesses that are not overly capitally intensive. This includes professional practices or small businesses that do not require large equipment purposes. Again, a business LOC is a fantastic credit facility for those seeking to establish a small business because it gives you the flexibility needed to draw down principal balances as needed rather than having to take on a lump sum loan. Professional practices and other service related businesses can startup and survive using a line of credit because there are no goods changing hands. Unless you a retailing business or distribution business, you may want to investigate using a traditional business loan versus a business line of credit in order to launch the operations of your business.

As stated above, revolving credit facilities are often used for businesses that have ongoing cash flow needs rather than large scale purchases. As we have stated time and time again, speaking to a CPA can assist you in determining which type of credit facility is most appropriate for you.