Advantages Of Cash Flow Statement Over Fund Flow Statement How a Business Line of Credit Works

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How a Business Line of Credit Works

A business line of credit works just like a credit card. A great advantage of using a business line of credit as opposed to a loan is that you can draw down the balance as needed. This ensures that you are only paying interest on the portion of the capital you are using at any given time. Therefore, if your business does not require all of its capital, you may want to consider using this type of credit facility for your company.

In almost all situations, you will need to provide substantial 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 related to your business. If you are an established business, you can expect the interest rate associated with your business line of credit to be significantly lower than if you were a new business. As an alternative to this type of financing, especially if you are starting a new business, you can consider taking out a home equity line of credit against 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 putting the value of your home as collateral for the new business. However, and as discussed earlier, you will definitely need to provide a personal guarantee as it relates to your business line of credit.

When you are approaching a financial institution for this type of financing, you must have a well-developed business plan or business prospectus. In this document, you need to provide an amortization table, expected profit and loss statement, cash flow analysis, balance sheet and business ratio page. Additionally, most financial institutions require you to submit at least three years of tax returns as it relates to your personal income as well as income generated by your business. Your accountant or financial advisor can help you put together the package you need to present to the bank.

In closing, a business line of credit is a great way to finance your company because you have a tremendous amount of control over how you can use the funds. Interest rates are generally low and costs associated with credit facilities are also low.

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