Seasonal businesses may encounter financial difficulties with cash flow due to seasonal merchandise sales and credit demands. This can especially affect start-up companies during their first few years when they have not generated enough capital to have consistent positive cash flows. Additionally, seasonal merchandise is expensive to purchase ahead of time, which means that businesses have to ride out inventory cycles until accounts receivables are collected.
Businesses that have not established healthy working capital can develop deficient cash flow problems. Many businesses are forced to close simply because they run out of cash funds and cannot make the necessary payments to stay afloat.
A business line of credit is ideal for businesses that require seasonal credit. These types of loans are designed for businesses that have trouble with seasonal cash flow. Businesses that have long-term working relationships with banks will sometimes be able to obtain a business line of credit. However, new businesses will likely be unable to receive a traditional line of credit from a bank.
Banks judge businesses’ abilities to pay back loans based on owners’ personal assets, second mortgages on homes, cash value of life insurance policies and assignment of stocks and bonds.
An unsecured line of credit may be used if businesses can show consistent earnings, multiple sources of repayment and excellent capital position. Traditional banks will specify maximum amounts that can be withdrawn, repayment terms, etc. These types of loans also require payments with interest on the outstanding principle only.
The following highlights helpful tips for businesses that need to establish a line of credit.
- Most traditional banks will not issue lines of credits to new businesses without owners’ personal guarantees of repayments.
- New businesses may ask for personal collateral to help secure any loans.
- If the business is a corporation or partnership and has more than one principal, traditional banks will require loan collateralization from all principals to obtain lines of credit.
- Businesses must present financial documents in standard accounting practices.
- New businesses will need to provide pro forma, such as cash flow documents that prove the ability to pay back all borrowed funds.
Venture capitalists offer excellent business lines of credit or business cash advances for startup companies. They do not require the stringent regulations that traditional banks do, which make it nearly impossible for start up companies to obtain the necessary loans to succeed in today’s competitive business world.