Why Consider a Business Line of Credit?

March 4, 2019

Timing-related issues can sometimes cause cashflow problems for small businesses.  Small businesses often use lines of credit when accounts receivable have not yet been collected, for cashflow infusions to cover payroll, inventory purchases, and materials needed for uninterrupted operations.

Businesses qualify for lines of credit based on particular criteria determined by the lender. Lenders assess a business’s ability to repay a loan by reviewing the business’s income/profit history, among other ratios. Personal income may also be considered as a secondary source.

1. How does it work?

A line of credit differs from a loan. When a business draws on a line of credit, payments are made on interest only on the amount that is advanced. A line of credit typically requires an annual “clean up”, returning the outstanding balance to zero dollars, generally for a 30-day period each year. Traditionally, a line of credit has a two-year term, subject to the lender’s renewal review.
A term loan works differently; the borrower makes payments over a pre-determined period of time. Usually payments include the borrowed principal and interest, and the loan is paid off in its entirety by the end of the term. Term length varies depending on the type of loan.

2. When does a line of credit come in handy?

A line of credit may be useful depending on a business’s size, operations, or industry. Other factors can also come into play, such as seasonality. For example, a retail jewelry business may need to make a significant investment in inventory ahead of a holiday such as Valentine’s Day. Revenue would not be realized immediately, therefore the business may desire a line of credit to manage cash shortfalls until sales are gained.

3. When is the best time to establish a line of credit?

A good time to establish a line of credit is when your business is generating a positive cash flow and is in overall good health. Business owners can take steps to help establish a business’s creditworthiness in advance of applying for a line of credit by opening a business bank account and paying all bills on time.

The turnaround time for a line of credit is usually quicker than a business loan. RSI Bank offers an expedited program for small businesses requiring a loan or line of credit for $100,000 or less. Some of the benefits of this program include a consolidated application and reduced closing costs. Furthermore, there is a simple one-time application fee. (Other lenders may charge a percentage of the amount borrowed as a monthly fee.)

Contact a Commercial Loan Officer to learn more

The information provided in this article is meant for educational purposes only and is not advice. Please speak with a Commercial Loan Officer for specific information on RSI Bank’s commercial loan programs, lines of credit, the business review process, and further details.