Cash flow is not a given when starting a business. It may be some time before a company begins generating enough revenue to sustain itself. There may also be an ebb and flow of cash due to seasonal trends. Some months may yield positive revenue and others may not. Because of this, businesses may need to establish lines of credit in order to combat the instability faced during the early stages of development.
Getting Started Depletes Cash Flow
When a business starts up, money in reserves is usually spent quickly. Funds are needed to rent office space, buy equipment, hire staff and market the company. These are just a few of the expenses a new business can face. Cash flow can easily be depleted before the first customer walks through the door. To combat negative reserves, businesses should consider lines of credit early on to avoid running out of funds.
How a Line of Credit Can Help
Every industry has a peak season, meaning the time of year when most sales are made. For retail companies, peak season is typically in the last quarter of the year as the holiday shopping season begins. For travel companies, most sales are made early in the year when people are planning their summer vacations. During off-peak times, a business without enough working capital will struggle. This is especially true of businesses that must continuously purchase inventory. It is during these times when businesses need a financial lifeline to survive.
Getting Approved for Funds
Banks that offer small business loans also offer lines of credit. Getting approved for this type of loan will likely require that the business owner provides collateral in order to guarantee repayment. This may be in the form of cash value of stocks and insurance policies or even a second mortgage. If the business is a partnership, all those involved will need to provide this type of collateral.
Startup Businesses Do Qualify
Most banks will provide credit to startups despite how long they’ve been in business. However, these startups will need to present financial documentation of their earnings and future potential cash flow. Income statements and balance sheets will also be required to demonstrate the health of the company. The lending institution will also need to know how a business plans on repaying the loan.
Understanding the fluctuations of demand and revenue in your business is critical. A business line of credit can be an important tool to keep your business afloat as you purchase inventory and anticipate off-peak dips. Securing such a loan will require a personal guarantee but is attainable for startups planning for future growth.