Cash Difference Between Balance Sheet And Statement Of Cash Flows How a Business Line of Credit Works

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How a Business Line of Credit Works

A business line of credit works in a very similar way to a credit card. One of the best advantages of using a business line of credit over a loan is that you can draw down your balance when needed. This ensures that you only pay interest on the portion of the capital you are using at any given time. If your business doesn’t need all the capital up front, you may want to consider using this type of credit for your business.

In almost all circumstances, you will need to provide a significant amount of collateral for your business line of credit. Common pieces of collateral include business property, personal real estate, vehicles, inventory, accounts receivable, and ongoing positive cash flow associated with your business. If you are an established business, then you can expect the interest rate associated with your business line of credit to be significantly lower than if you are a new business. As an alternative to this type of financing, especially if you are starting a new business, you may want to consider taking out a home equity line of credit for your personal residence. Of course, the risk associated with this type of capital is extremely high. This is due to the fact that you are pledging the value of your home as collateral for a new business venture. However, as mentioned earlier, you will definitely need to provide a personal guarantee as it relates to your business line of credit.

When you approach a financial institution for this type of financing, you will need to have a well-crafted business plan or business prospectus. In this document, you will need to provide a loan amortization table, an expected income statement, a cash flow analysis, a balance sheet, and a business relationship page. In addition, most financial institutions will require you to submit at least three years’ worth of tax returns as they relate to your personal income and the income generated by your business. Your accountant or financial advisor can help you put together the package needed to submit to the bank.

In conclusion, a business line of credit is one of the best ways to finance your business due to the fact that it gives you tremendous control over how you can use the funds. Interest rates are usually lower, and the costs associated with credit are also lower.

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