Business Line of Credit

A business line of credit represents a common financing instrument featured by most business banks. This form of capital can be accessed up to a certain amount, as agreed upon between the borrower and the lending institution. In the typical case, no collateral should be provided for approval, unless the applicant does not meet the credit score requirements of the bank.

As a financial instrument, the business line of credit is beneficial for businesses in meeting the short-term needs for working capital. It can be used to purchase seasonal inventory or cover cash flow shortages and unforeseen operating expenses.

The funding a business will receive in the form of a line of credit depends on the projected cash flow for the financial year and the past revenues. Approval requires demonstrating debt coverage and presenting a positive cash flow. In other words, one’s business is to make profits and pay off financial obligations on time in regular monthly payments. A good way of finding out if your enterprise meets the eligibility criteria is to review your business bank account and check if the average daily balances, cash out, and cash in have been sufficient to adequately cover the loan repayment.

The business line of credit is usually revolving, similar to credit cards, with market-based, adjustable interest rate and no fixed payment terms. In most cases, the client can choose to cover the full monthly payment (interest and principal) and pay the balance in full before the maturity date without incurring penalty.

Banking institutions grant secured lines of credit to the majority of start-up ventures. If the business demonstrates multiple sources of repayment, excellent capital position, and consistent earnings, an unsecured line of credit can be extended. Typically, the lending institution will specify a maximum amount of funding that the client can draw on when required. Interest is payable on the outstanding capital only.

The bank also requests information on other methods of repayment in case the first source does not come through. Bank representatives look for sufficient elasticity in the business operations that can accommodate temporary reversals. What happens if your produce is not selling as projected? What alternative sources of funding are available for repayment?

The lender may also request that you pay down the line of credit if the payment schedule has not been followed. This scenario stands even if the total borrowed amount is not due for a couple of more months. Banks are not willing to approve business lines of credit that help clients manage their cash flow. Rather than that, this financial instrument is suited for cyclical borrowing at preset pay-down intervals. A failure to repay the amount on schedule suggests that the client is incapable of managing cash.

In Canada, business lines of credit are offered by the major financial providers such as the Bank of Nova Scotia, TD Canada Trust, Canadian Imperial Bank of Commerce, National Bank of Canada, as well as by many of the smaller second tier banks.