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Opening a New Line of Credit

By Townes Haas   |    July 15, 2015   |    12:28 PM

As your business grows, you might consider new funding sources. These can be used to help you grow or to act as a sort of security blanket for the business. Either way, it's important to go have everything you need in place before opening new lines of credit.

As a small business, there a few ways you can acquire more funds and new lines of credit can be a huge help so that you expand your business. To acquire a credit line, you will have to provide financial information about your business, as well as yourself, to the lender. When you go to inquire be ready to supply income and other statements or tax returns. You may also be required to produce a business plan which demonstrates how your business will earn money to make payments.

There are multiple places that small business owners can go to open credit lines. To find your best match, do your research and shop around among the available lenders so you can get the absolute best terms. Make sure as well that you check your personal credit report beforehand; if your score is low you may have to pay higher interest rates.

With a limited track record it might be hard for you to acquire a business loan. Applying for an unsecured small business line of credit is one way of overcoming that obstacle. Start small and accept whatever size line a lender is willing to provide you. Even if the credit line is less than the sum you need for the long term, it might be feasible for the short term. This will allow you to get a foot into the bank's financing door. If you put the credit line to good use, pay it off diligently and on time you will acquire a good track record. Then you can gradually seek to expand the credit line. Numerous major banks that serve small businesses offer unsecured business credit lines of $5,000 to $100,000 for firms that have been around at least 2 years. Smaller banks may also have very good options, as well as offering you resources to grow your business.

When opening a credit line, your bank will commit a specified maximum amount of funds from which you are permitted to draw. You have the right to repay and re-borrow during the agreed-on time, which usually will not exceed a year. You pay interest only on the outstanding principal. If your business is new, the lender may not be satisfied with the primary and secondary sources of repayment and ask you for personal collateral to secure the agreement.

Before agreeing to the terms of the line of credit, it is vital you ask your bank if they have an interest rate lock-in feature to protect you against increasing rates in the future. Some lenders will allow you to lock in an interest rate for a year. It is not recommended that you use a credit line for cash advances, as many banks charge a hefty cash advance fee that is added to the interest you have to pay.

When opening a line of credit for your business, be sure to pay down your debt completely so as to keep the credit in place and your lender happy. Also ensure you have a sturdy plan to guarantee business cash flow especially in times of adverse circumstances.