Contractors know better than anyone that there can be ups and downs throughout the course of the business year. Cash flow may be high one minute and low the next. As a result, companies often open a small business line of credit that offers them the security of monetary flexibility.
What is a Business Line of Credit?
A small business line of credit gives landscapers, carpenters or other contractors the ability to borrow up to a certain threshold on an as-needed basis. The advantage to the borrower is that they are only required to pay interest on money drawn from the account, not the entire capital of the loan.
4 Steps to Obtain a Line of Credit
1) Write a Business Plan
Your business plan should outline how your organization will earn the money it needs to make its loan payments. This is a particularly important step for start-up contractors who don’t have the ability to verify their cash flow.
Since your business performance will be under review, be able to show as much data as possible, including past, present and projected earnings.
2) Build a Credit History
Whether it’s business or personal, contractors need to have a positive credit history in order to secure a line of credit.
These four easy steps will help improve your chances:
- Set up a business bank account
- Pay bills on time
- Establish phone and utilities bills in the business’ name
- Monitor your credit score
3) Research Available Options
Today, there are more resources than ever online to research available lines of credit. Contractors have the ability to weigh options that most benefit their business as they choose between a traditional bank, a local credit union or an alternative lender.
4) Demonstrate Positive Cash Flow
Whichever lender you choose, the institution will want to know that you will have the ability to pay back the money you borrow.
In many cases, a contractor will have to demonstrate that their business is already maintaining a positive cash flow even before securing a loan.
How can a Contractor use a Line of Credit?
A small business line of credit may be used to help a company maintain positive cash flow. These funds can be useful in the event of a cash flow crunch caused by:
- Slow paying customers
- A drop in sales
- Higher payroll
- Unexpected expenses
Whatever the reason you may need the funds, new or growing contractors can benefit from the financial stability of a line of credit.