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SmallBiz Funding, Part 4: The Line of Credit
We’ve been going through options for small business funding for a few posts now — from the old do-it-yourself funding method to a variety of loans you might want to consider. But what if it’s less about startup capital and more about month-to-month liquidity? What if you need access to “just in case” money — a cash-flow cushion, if you will? That’s when it’s time to look into a bank-backed line of credit.
What is a line of credit?
A line of credit is a lot like the “overdraft protection” you might have on your personal checking account. A pre-determined sum of money sits, at the ready, awaiting your business needs. If it goes untouched, nothing happens — it’s only when you actually tap this reserve that you’ll need to pay interest to the bank — just like a credit card. When you do use money from the account, you’ll need to pay it back with interest beginning the next month — just like a credit card. So wait — why not just use a credit card?
How is a line of credit different from a credit card?
It’s a matter of decimal points — lots of money. Depending on your personal credit history, business credit history and other factors, a line of credit can be secured for tens, even hundreds of thousands of dollars or more. Major corporations operate on lines of credit to secure their payroll and day-to-day expenses.
Where’s the catch?
As with any funding source, there are a few “hoops” to jump through. To obtain a line of credit, you’ll have to put your own neck on the line — guaranteeing payments personally, and suffering the consequences for late payments through your own personal credit. Certainly, it’s no free ride. But if you’re reasonably confident in the continued success of your business and your ability to keep an eye on your cash-flow, a line of credit might be the next step in helping your small biz blossom.
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Gilberto Sanchez, Esq.
JD, University of Florida, 2003
Member, Florida Bar