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Business Credit: Small Business Line of Credit

Published 10/5/2012

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Over 15 years in business
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Most people who start a business understand that it may require a significant amount of capital, including enough to pay any anticipated expenses for the first six months. Many believe that the products and/or services the business produces will provide enough cash flow to cover expenses and possibly even a profit. However, in many situations the cash flow does not always occur as projected due to many different reasons. This may occur when the business is new or at any time during the life of the business. In order for a business to function through periods of economic challenge, it may have to rely on credit to operate at a level that will make it profitable. For Alternative Lending see Factoring Companies for Receivable Financing.

Timing is everything in getting a small business line of credit

For this and other reasons, business owners need to begin as soon as possible to establish a line of credit for the business. Businesses must establish credit just as much as an individual has to, except that there may be some additional documentation that a business may have to produce. Another factor that financial institutions take into consideration is the type of ownership of the business.

Ability to pay back what is borrowed on your credit line

Whether extending credit to an individual or a business, financial institutions want to see that the recipient of a line of credit has the ability to pay back any amount of money loaned. The financial institution wants to see total assets, liabilities and income. In addition, the financial institution also wants to see some history that the individual or business has in paying their current liabilities.

Financial records showing you can maintain a small line of credit

Every business needs to keep accurate records of every asset and liability in addition to recording income earned and expenses. Software such as Quicken makes business record keeping easily and is also great for producing financial statements, which financial institutions may wish to examine in order to determine the amount of credit they are willing to extend. Many businesses can also keep accurate records on other software such as Microsoft Excel or even free software such as Open Office. However, accounting software has many built in features that would otherwise have to be manually set up. The cost of accounting software may be of value to a business considering the time that it takes to make other software perform the same functions.

Income tax return

In addition to financial statements, financial institutions like to see an income tax return that shows a significant amount of income. Financial institutions also prefer to lend money to businesses that have low existing debt. If the business has not filed a tax return, the financial institution may require some form of security or a cosigner. The cosigner may be the business owner, partner(s) or others with any interest in the business. As long as the cosigner has good credit the financial institution is usually willing to work with a business that is just starting out and trying to establish credit.

Business Credit with your vendors

It is important that a business that has yet to establish credit pay its bills on time, whether utilities, vendors or any other financial obligations. Even if the entity receiving the payment does not report to a credit bureau, by showing regular payments over a six month period, the financial institution can see a pattern of payments and, barring any negative report, can assume that the business is making such payments on time.

Timing is a very important element in establishing a line of credit for a business. A business should apply for an open line of credit as soon as possible, well before it is actually needed. When a business is first establishing a line of credit, it may not be for a very large amount. Financial institutions typically start out conservative on loans until they see a history between them and the business.

Many businesses will set up automatic payments to pay recurring expenses such as utilities with a business credit card. They can then pay the credit card balance off every month when the statement arrives. The business can also pay the balance through their checking account. The important thing is to pay the bill off each month so that they do not accrue a balance and to make the payment on time.

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Receivable Financing Rates

Starting At 0.69% - 1.59% Or Prime +2% & Admin Fee

  • Quick Approval Process!
  • No Financials up to $350k
  • Easy Set-Up in 3 to 5 Days
  • Over 15 years in business
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Trade references

In many situations, a business is also obtaining a less formal type of credit that many do not consider as credit because of the short duration in which credit is granted. These situations occur when a company uses a vendor and they do not pay when goods are services are provided. Many vendors will have terms that allow the business to pay their bill in 15, 30, 60 or even 90 days, although 30 days is the most common. Financial institutions refer to these situations as trade references.

While these vendors do not normally report directly to any of the credit bureaus, by listing them as references on a credit application, the vendor can attest to the business' regular and on time payments. The business may even request a reference letter from any vendors that they do business with and add any reference letters to their portfolio or loan application.

Further documentation

Financial institutions like some documentation as to a business' income. This can be difficult to accomplish for some businesses because of confidentiality of their customers and/or clients. The business may have to get a limited release of information from any customer and/or client that they wish to show a regular source of income. In areas where information is sensitive or when a client and/or customer are unwilling to grant permission, the financial institution may accept partial documentation. In some such situations, the business or financial institution may wish to employ an independent third party to audit the business in order to ascertain that the business is able to pay back its obligations and that there are no other foreseeable difficulties that may hinder the repayment according to the terms that the financial institution is willing to offer.

Business plan

The business should always keep on hand a business plan. The business plan maps out what the business hopes to accomplish during the immediate future and the business' plans over an extended period. It should project conservative approximation of future revenues and realistic estimates of expenses based upon what the business currently has for expenses and what other businesses have for actual expenses when operating at the targeted level of operation.

It is real easy for a business plan to become outdated. Real life changes occur during the life of the business, including demands on the business' products and/or services. In addition, other businesses may enter into the field giving a business competition, which may affect changes in the way it does business, prices they may charge, additional expenses, such as advertising and other unforeseen changes. Any time that a business is applying for new credit, it may wish to review its business plan and amend it to reflect any changes.

SBA Loans and Small Business Lines of Credit

New small businesses face many obstacles and establishing credit is perhaps one of the bigger obstacles that a business may have to overcome. However, the Small Business Administration can assist by providing information in all of the areas discussed here as well as other areas in business. Most of their information is either free or has a nominal fee to cover the expenses of providing the information. In addition to assisting you with information on obtaining a line of credit, their web site also offers information on grants, financial counseling and various other topics of interest to the small business owner. Visit them at http://www.sba.gov/.

Request a Call back

24/7

Receivable Financing Rates

Starting At 0.69% - 1.59% Or Prime +2% & Admin Fee

  • Quick Approval Process!
  • No Financials up to $350k
  • Easy Set-Up in 3 to 5 Days
  • Over 15 years in business
Click Here for a Quote
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