Advantages and Disadvantages of Business Lines or Loans Advantages of business lines:
Business lines are used for ongoing purchases that are connected to a sale. Usually inventory and overhead is funded with a business line of credit. Business lines of credit are expected to be used each month, repaid and then used again.Business lines of credit do not have collateral, but the owners are often asked to guarantee the line. That means if the business fails, the owner agrees to use his/her personal assets to repay the line of credit. Required collateral and documentation For loans, most banks require either a personal guarantee or specific collateral. A personal guarantee means if your business assets are insufficient, you will use your personal assets to pay back the loan. For sole proprietors and partnerships, this is irrelevant, since your business debts and personal debts are mixed. However, it is significant for LLCs and corporations, which normally are protected from business debts.
Collateral can be cash, home equity, equipment, receivables, or investments. Banks will also require your business and personal tax returns, business financial statements, and a plan for the proceeds. You will also need to provide a copy of your business formation documents.
Lines of credit are usually based on a guarantor's personal credit, with business financial statements showing the ability to repay. You will need to provide a copy of your business formation documents.Based on your credit score, banks may require that your collateral be "protected" so it is not spent. You may have to deposit cash into a long-term CD, they may file a UCC statement on equipment so it cannot be sold, or they may place a deed of trust on your home, so they are paid if your home is sold. Federal SBA or state guaranteed loans Federal SBA or state guaranteed loans protect the lender from 50 to 80% of any loss on an insured loan. It does not protect the borrower - so if a loan is in default, the entire loan goes against the borrower's credit record.
You get a guaranteed loan through your bank. Each bank has its own lending policies, so if you are rejected by one bank, it does not mean you will be rejected by the bank next door.Click here for a list of preferred lenders for your area. Building business credit You will reach a major business milestone when you are able to get business credit based on your business alone. To do that, you need to build business credit. Click here for information from the Funding Toolkit within the Tools for Business. Best Practices