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Commercial Line Of Credit - How To Apply For a Commercial Line of Credit

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A commercial line of credit is a loan made by a financial institution to help a small business finance its short-term needs – for example, to purchase inventory, or a necessary piece of equipment, or even to cover operational expenses during an unanticipated downturn in sales. For a loan in excess of $25,000, the financial institution will most likely require some sort of collateral in which case the line of credit is referred to as a secured credit line. Businesses that can show profitability for at least two years and are backed by a personal guarantor with an excellent credit history may also be able to qualify for an unsecured commercial line of credit between $10,000 and $15,000.

Cash flow is the lifeblood of any small business, but frequently it’s difficult to manage. Often the nature of the challenge derives from seasonal fluctuations in product or service sales: a retail operation in a tourist town, for example, will experience heightened revenue during the summer and on holiday weekends and a veritable dead zone during January and February.

Typically, commercial lines of credit are revolving funds that work something like credit cards: the financial institution makes a certain amount of money available to the business and the business draws from that what it needs, as it needs it. The repayment process begins immediately. Loan funds are accessed through checks provided by the financial institution issuing the loan and are generally acceptable everywhere the business’s own checks are accepted. The loan is also available as cash though usually at a higher annual percentage rate (APR) of interest than when it is used to purchase goods.

Applying For a Commercial Line of Credit

The recent economic downturn has made obtaining a commercial line of credit far more difficult than it was a few short years ago, even for small businesses that can demonstrate profitability and have maintained a strong credit rating. However, it is still possible: financial institutions, after all, are in business to make money and the way they make money is though interest on loans.

The critical factor in obtaining a credit line will be demonstrating business cash flow and profitability. The financial institution making the loan want all loan applications to address:

• Ability To Repay the Loan: Banks will review a business’s financial statements carefully in order to determine whether the business’s cash flow will be sufficient to pay the loan back. If the business is relatively new, or has been operating marginally, a detailed explanation of how the business intends to repay the loan is absolutely necessary, and even then the bank may ask for a secondary repayment source such as collateral.

• Credit History: Banks will analyze the credit history of the business and its principals. It’s a good idea to contact TransUnion, Equifax, TRW, or one of the other credit reporting agencies, obtain a copy of their records and review them carefully to make sure all the information they contain is correct. Often these records contain errors – for example, a bill that’s been paid may still be listed as unpaid. This error can be corrected by presenting the credit bureau with a letter from the biller confirming the payment, but it may take four weeks before the credit report is updated with accurate information. An occasional late payment of a month or less will not affect a business’s loan-worthiness. However, if a business has been consistently late in making payments, have unpaid credits that have been charge off or has any outstanding judgments against it, it is unlikely to qualify for a commercial line of credit.

It’s critical to research commercial lines of credit offered by different banks and institutions to ensure a perfect fit with the business’s needs and the best terms. Wells Fargo, Bank of America and Chase all offer small business loans of up to $100,000 that can be applied for online, even by businesses that are not customers. Local community banks and credit unions may be a better solution though, particularly if a small business has a high profile within its own community. Finally, UPS has become a small business lender in conjunction with its UPS Capital division, working with the Small Business Administration and other government-guaranteed loan programs.

Commercial Second Mortgage - A commercial second mortgage is a popular option these days, as businesses are looking to consolidate debt, and borrow against the equity of their building. [next] [back] Commercial Interest Rates - Tips on Commercial Interest Rates

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