Personal Lines of Credit

If you’re starting a business, or your business just doesn’t qualify, a personal line of credit can be the answer when small sums of money are needed. In these cases, a business owner will obtain a home equity line of credit (HELOC) which is secured against their home. If your credit is very good you may qualify for an ‘unsecured’ line of credit, although ‘unsecured’ is misleading. In the event of default due to a failure of the business, you are still personally on the hook for the money you have borrowed and the lender can, and will, sue you to recover their money.

“A line of credit is easy to get” Wrong. The days when a bank would lend to small businesses on the strength of a good business plan are gone. While private investors may still take on that kind of risk, financial institutions do not. It would be much more accurate to say that ‘Lines of credit are relatively easy to get – if you have collateral’. No bank or large financial institution will give you a line of credit unless you have some easily liquidatable asset such as real estate. In addition, your credit score and business cash flow will be taken in to account. Finally, most lenders will require that you have been in business for at least 2 years.

Credit Lines have the advantage of flexibility and are sometimes the only option for small business owners, however they also have limitations. Getting a line of credit increased once in place can be very difficult. Even if your business is successful, if you’ve maxed out your line of credit and need more money to expand, you’ll need to jump through a number of hoops with your bank to prove that you’re worth the risk and, in many cases, the less time you’ve been in business, the harder it will be to extend your credit line. So if you’ve found fast success, you’ll likely need to explore other options. The best alternative for a credit line for small businesses is the SBA 7(a) loan program, which can provide working capital up to $350,000 for qualifying borrowers.

What you will need to qualify?

Minimum Time in Operation: 6 months Minimum Revenue: $50,000 annually

Benefits and Drawbacks

Benefits Lukewarm credit OK A good credit building tool Only pay interest on the funds you use Quick and convenient access to cash Can be used for any purpose Drawbacks Updated financials may be required Lender can close the line of credit at any time Collateral may be required Poor credit equals a higher interest rate

How does Equipment Financing Work?

Equipment financing comes in two basic forms. First, qualifying businesses can borrow funds to purchase necessary equipment, everything from bulldozers to barbeques, where the equipment itself serves as collateral for the loan, much as with a car loan or lease. Or, with a Sale Leaseback Agreement, you may be able to borrow money against equipment you already own, and use that cash for expansion or other needs. Equipment Financing goes by a number of different names. It’s also known as an Equipment Finance Agreement (EFA), Capital Lease, Finance Lease, or $1.00 Buyout (because you can buy the equipment at the end of the lease for one dollar or similar small cash payment). In fact, most equipment leases have a Fair Market Value (FMV) residual, a fancy accounting term that just means you’ll need to make a lump cash payment at the end of the lease if you want to keep the equipment.

What are some types of Equipment Loans?

There are a number of different types of Equipment Loan available: Step-Up Step-Down Do you run a seasonal business or a business where profitability is subject to market trends? A Step-Up Step-Down loan allows you to adjust payments so you pay more when business is good and less during slow times. Quarterly Equipment Lease If your business runs long term projects, or simply doesn’t function on a financial month-to-month schedule, quarterly payments may be the answer. Re-financing Many leases have a payout at the end of their term, which you may not have the cash to cover. There are also situations where a slowdown in business or a freeing of capital for expansion or special projects may require a refinance. Alternatively, business may be booming and you might want to shorten an existing lease term to reduce losses to interest payments. Finally, an improvement in your credit rating might allow you to negotiate a better lease rate. Sale Leaseback A sale leaseback agreement allows you to sell existing equipment you already own to a lender for a lump sum cash payment at current fair market value. You then lease back the equipment, keeping it for your operations while accessing funds for other needs. Fair Market Value Lease Does your business rely on equipment with rapidly updating technology, such as the latest generation of computers or robotic vehicles and equipment? A Fair Market Value lease allows you to defer some of the purchase price to the end of your lease term. You then have the option to purchase the equipment at current fair market value, continue lease payments or return the equipment to the lender and upgrade to new equipment. Lease or Loan? There’s a common perception that loans are better than leases due to the terms but this is not always the case. There are times when a lease makes good financial sense as lease payments can be written off as an operating expense.

What are the advantages of an Equipment Loan?

While equipment financing is sometimes the only option for startup or expansion, it can also be a great investment when capital exists for this purpose but could be put to better use elsewhere. Since the loan is secured against the equipment itself and often has no down payment, and you’re not out of pocket for your purchases, you might find that making the interest payments on this kind of loan can actually increase profitability by allowing you to invest your available cash in areas of your business that will give a better return. Equipment also has upkeep costs, requiring regular maintenance and occasional repair. Equipment financing may allow you to replace your aging equipment with new equipment for less monthly outlay then maintaining your existing equipment. Finally, there can be significant tax savings as payments may be deductible, in full or in part, depending upon the equipment and structure of the loan. Big Think can advise and assist you with finding the right kind of Equipment Loan for your business.

What are the benefits and drawbacks or an Equipment Loan?

Benefits: Quick access to cash Limited paperwork Equipment serves as collateral Lukewarm credit OK Drawbacks: Down payment may be required Depreciation will reduce tax deductions May have large buyout at end of term Equipment subject to obsolescence

How do I qualify for an Equipment Loan?

Minimum Credit Score: 600 Minimum Time in Operation: 11 months Minimum Revenue: $100,000 annually

FAQs – Page 4 – Cashifi

Personal Lines of Credit
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The Myth
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Should I apply?
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What you will need to qualify?
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Benefits and Drawbacks
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How does Equipment Financing Work?
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What are some types of Equipment Loans?
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What are the advantages of an Equipment Loan?
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What are the benefits and drawbacks or an Equipment Loan?
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How do I qualify for an Equipment Loan?
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FAQs