Business Line of Credit: What Entrepreneurs Need to Know

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Cash flow management is an issue that many entrepreneurs in Arizona face. Whether you’re a start-up or an established business owner, cash flow fluctuates throughout the year. As a result of seasonal fluctuations or gaps between payables and receivables, you could find yourself in need of capital to manage these fluctuations. Start-ups frequently face the dilemma of how to keep the doors open during the time between cash layout and cash collection. You don’t want to shut the doors just because you’ve run out of cash. 


A line of credit can help a business owner through seasonal credit demands. A line of credit will also make it possible to purchase inventory in anticipation of future revenues. Remember, the time to talk to your bank or small business advisor about a line of credit is before you’re in a cash crunch.


Getting a business line of credit approved depends on your business’s ability to repay the loan. If you find that your banker is hesitant to grant a business line of credit, ask if they’d be willing to look at personal assets, assignment of stocks and bonds or the assignment of the cash value of life insurance policies as collateral. Once the business demonstrates consistent earnings and has been able to pay the loan back, the bank may then allow your line of credit to be unsecured.


As with any loan, the bank needs to know how you will repay the line of credit in the event your income source for repayment – your business income – falls through. A banker will look for enough of a cushion in your income and expenses to accommodate temporary cash flow crunches. If your inventory doesn’t sell, or if receivables don’t come through on time, do you have other sources of income to drawn on for line of credit repayment?  


Keep in mind that banks don’t typically approve lines of credit for cash flow management use. They want to see the line of credit for cyclical borrowing with identified pay-down intervals.  


Tips for establishing a line of credit for your Arizona business:

  • If your business venture is new and the bank isn’t convinced it will generate enough income to repay the line of credit, it will ask for personal collateral as security. Be prepared to have collateral to offer up.
  • The owner will have to personally guarantee repayment of the line of credit.
  • If there is more than one principal in the venture, the bank will collateralize the loan from all principals involved in the line of credit.
  • Before you go meet with a banker take time to put together a business plan. The bank will want to see financial documents that show you’ve given time and thought to how you will grow your business.
  • Make an appointment with a small business advisor such as BASC Expertise before you schedule time with your banker. Explain what you are looking for and ask them for advice and assistance with putting together income and expense sheets and cash flow projections. 


You don’t want to open your business with lines of credit or large loan payments looming, there may come a time when you need to request a line of credit. The time to request it is before you need it. Your small business accounting professional can help you with cash flows and projections on the amount of the line of credit you might need and more importantly, whether your business can afford to repay it.  


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