Qualifying for a business line of credit can often be a simple procedure, but it’s important to understand how that line of credit can and cannot be spent. Read up on how you are allowed to use a line of credit for your business.

How You Can Use A Business Line of Credit

Below are some of the ways you are allowed to use a business line of credit. See if they match any of the ways you are thinking about applying your business line of credit:

• Short-term loans: To borrow on a business line of credit, the need should be for a short duration. The borrowing typically needs to be one year or less.
• Flexible credit: Business lines of credit work very similar to a personal credit card. You are allowed to borrow up to the maximum amount of credit, pay down the credit, and re-borrow as many times as needed within the duration of the given business line of credit. Upon maturity, you either have to pay the line in full or renew the line with the bank.
• Periodic shortfalls in cash flow: This instance occurs when the business is producing a product or service and waiting to receive payments from customers.

How You Can’t Use A Business Line of Credit

Business lines of credit can provide lots of opportunity for your business. However, they do come with some restrictions for use:

• Equipment or real estate: You cannot use your business line of credit to pay for hard assets. Hard assets include items that are paid for over a period, such as a monthly mortgage for a home or building. These items require term financing.
• Funding losses: You are expected to cover losses with additional owner’s investment, not the business line of credit. Banks can finance working capital and hard assets, but not losses.
• Starting businesses: To start a business, you must put your money or equity investment in first—similar to a home mortgage. However, investing in a business typically allows for a corresponding line of credit.

Steps to Qualify For A Business Line of Credit

• Complete documentation: Have two to three years of successful operating history to show to banks. Business tax returns typically suffice; you may also need to submit personal finance information.
• Lending programs: If your business is a startup, or less than three years old, banks often utilize the Small Business Administration lending programs. Visit www.sba.gov to get a more detailed description and learn if your business would qualify.
• Personal credit: Keep your personal credit in order. If any credit history problems exist, be prepared to give an explanation. Be diligent in keeping your credit in good shape, and make strides towards improving it if any red flags exist.

A line of credit is a valuable tool for business owners. All businesses should consider putting lines of credit in place whether or not there is an immediate need. The best time to obtain the business line of credit is when the business is profitable, so think about establishing one now to save for future use, and unforeseen obstacles. Qualifying for a business line of credit is a prudential move towards protecting and giving opportunity to your business.