Business Capital Sources
Establish a Business Line of Credit Before You Need It
If you don't really need a business line of credit right now, it may not occur to you to obtain one. When you do need it, though, it's going to be tougher to get.
John was a bright engineer and a hard worker. He was also very financially conservative. When he started a custom software company with a partner, he would periodically borrow short-term business capital from his mother.
John’s partner suggested establishing a line of credit at the bank, periodically borrowing and paying back even if the money wasn’t needed as a way of building business credit. John balked at the fees, personal guaranties and interest rates that couldn’t compare with the Bank of Mom.
Unfortunately John’s mother passed away and the kitty he had been borrowing from was divided among all the siblings. More unfortunately, the business needed funds to finance new projects and had no other borrowing sources.
The facts of most businesses are that sooner or later you’ll need a line of credit. Credit cards are great, but they can take you only so far. Having an established relationship with your own banker can let you capitalize on opportunities or weather challenges in ways credit card companies can’t offer.
If you don’t have a line of credit for your business, establish one now. If you put it off until you need it, you have a higher risk of being declined. If you’re declined now, you have time to address whatever shortcomings the bank perceives and eventually establish your line before it were to become critical.
Unless yours is a mature business, banks are going to ask for a guarantor. Some business owners bristle at the idea of having to provide a personal guarantee, feeling the business should be worthy of standing on its own credit. Face it. No matter how established your business, its first line of credit will almost always require a guarantee.
The good news is that after two or three years of successful track record, some banks will let you off the guarantee. So the sooner you get that line established, the sooner you’ll be off the hook.
Though it’s a time-worn idea, the suggestion to build credit by borrowing money you don’t need, hiding it in a savings account for a while, then paying it back is still valid. The unnecessary interest expenses are small change compared to the strong credit you’re building for your company. If you need to increase your line, your chances are much better if you’ve demonstrated responsible use of what you’ve had, rather than having let it sit idle.
In fact, as your business grows you’ll want to keep bumping your credit limit up, even if you don’t have a critical need for the extra cushion. When the day comes you do need it, it may be tougher to get. By asking early, you again get a chance to work on any changes necessary to qualify for the higher limit before you actually need it.
Business is about planning. Having a business line of credit before you need it is part of the plan.
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