When applying for a credit facility, you will most likely be required to have a well written business plan to showcase what you intend to do with the business loc. This may not be the case if you are using a home equity line of credit secured by your personal residence. If you are seeking to obtain a standard business line of credit then you will most certainly be required to have a business plan. BusinessLOC.com has a sample business plan outline that you can use to develop a plan that showcases how you intend to use the debt proceeds.

 

The key to a good business plan is to have a 25 to 45 page summary of your business, how you intend to use the capital sought, a description of the product/service you a selling, and a three year financial model that showcases you previous and anticipated profit and loss statements, cash flow analysis, balance sheet, and breakeven analysis. Again, these tools have been included for free by BusinessLOC.com.

 

If you are having significant trouble with writing your business plan then you may want to consider hiring a professional firm to assist you in this process. Often, business planning firms have extensive relationships with banks, finance companies, and private lenders that will be interested in your business project or established company. These firms may or may not take a success fee if they are able to secure a business loc for you. Prior to working with a business planning firm, you should check the credentials of the individual producing your business plan, make sure that they are registered with the Better Business Bureau, and that they have an established track record of obtaining credit facilities through their produced business plans.

 

Although not the most common method of acquiring startup capital, using a business LOC as financing to launch your business venture is not uncommon. As we have discussed in previous articles, there are a number of different method of financing your new business venture including using your own capital, raising money from private investors, or taking out a lump sum business loan.

 

However, using a business line of credit gives you more control over your business development. If you intend to build your business over a period of time then it may be to your advantage to use a business LOC versus as business loan. This allows you to only draw down the funds as needed, and you will only be required to pay interest on the portion of principal that you have drawn down. Although many new entrepreneurs seek to acquire all of the funds that they need via a traditional business loan, the flexibility of a business line of credit is often overlooked. When developing your business plan, you should entertain the concept of using a term based credit line rather than a business loan. Again, your accountant or financial advisor can assist you in making the proper determination of whether or not using a line of credit is more appropriate than a standard lump sum based credit facility.

 

One of the draw backs to using a business LOC as startup capital is the ever changing lending environment. Often, business lines of credit contain covenants that state that a bank can terminate the loan if certain business criteria are not met. These criteria can include depreciation of collateral, not producing enough positive cash flow, and changes in the credit quality of the borrower. However, with the recent passing of the credit reform act in 2010, regulations have begun to favor the small business borrower.

A Business LOC, while concurrently providing your business with additional capital needed to grow and finance your business, also acts a vehicle that you can use to generate a higher return on your business investment. Anytime you start a business, you most likely will have contributed capital towards the startup. For instance, let’s assumes that you start a small business and that you put $20,000 of your own capital into your company’s bank account. Let’s also assume that you acquire a $100,000 business line of credit that will be used to finance the inventory of your business. In this example, we will also assume that this business will make $60,000 of income in its first year of capital.

 

If we decided to forego the use of a business line of credit then we could put $120,000 of our own capital into our bank account. During this year of business, we would have generated a return of 50% on our investment. This is because we earned $60,000 on our $120,000 investment. However, by using a business line of credit (and earning the same $60,000) we have earned a return of 300% on our invested equity capital of $20,000.

 

However, with the use of leverage comes higher risk. Much like the extensive use of credit that caused the issues in the housing market – extensive use of credit can have the same negative effects on a business. In the event that the business does poorly, you will be responsible for the funds that you have borrowed. This is especially true if you have personally guaranteed to the business line of credit – and in today’s economy – it is almost certain that you will be required to do so unless your business has been established for a significant period of time. Banks, finance companies, and other institutions that grant business lines of credit have increased their borrowing standards immensely in order to curb future loses on business loans and business LOC.