As a business owner, you may sometimes need help funding short-term working capital needs. This is a great opportunity to be introduced to, and to consider, a business line of credit. You’ll draw only the amount you need from your credit line and pay interest only on the amount you draw.
The type of business line you may be eligible for varies from business to business. And in most cases, the size of the line of credit is based on the amount of inventory and accounts receivable your business has. *Accounts receivable represents your sales made which have not yet been paid for.
For example, you run a manufacturing business and a customer places an order for $75,000 worth of product. The order requires $20,000 worth of raw materials and $20,000 worth of labor to make the product. You, as the business owner, could draw $40,000 from your line of credit and use those funds to purchase the materials and cover your labor costs. After the product is shipped, and the customer pays their $75,000 invoice, you then repay your line of credit and retain the profit.
Business lines of credit are usually set up on a revolving basis, similar to a credit card. As the customer, you are allowed to borrow and repay the funds over and over again as needed. And much like a credit card, you only pay interest on the amount used. So if your line of credit is $100,000, but you have only used $30,000 of it, interest would only accrue against the $30,000 and would be paid monthly.
A typical line of credit is set up on a 12 month term, which allows the bank to review your business financials annually. However, on a monthly basis, you may be required to provide your financial institution with a report showing the amounts you have in inventory and accounts receivable. Most of these types of credit allow you, the borrower, to advance funds up to 50% of your inventory and 75% against your qualified accounts receivable.
Example: If your business is approved for a $500,000 line of credit, you would need to provide your financial institution with a monthly report showing the amount you have in each category (inventory and accounts receivable). If your business has $200,000 in inventory and $300,000 in accounts receivable, you would be allowed to draw a maximum of $325,000 for that particular month ($100,000 on inventory and $225,000 on accounts receivable). Make sense?
Business lines of credit have some good things going for them, including:
- Convenient access to your line of credit – when funds are drawn on the line of credit, the money is transferred into your business checking account
- Flexible collateral options
- Interest-only payments due monthly
- Automatic-payment option
- Competitive rates
While you can use your line of credit for just about any short-term working capital need, credit is most typically used to cover material purchases and labor costs for a current job.
If this product piques your interest and you think a business line of credit might be a good idea for your business, Bank Five Nine has commercial lenders who can help. For more information, or to see if you’re eligible, contact a Commercial Lender today!