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How Businesses Determine Lines of Credit

Compared to what majority of people perceive, it is not really appropriate to have credit lines for active businesses in the market. This article would share some reliable tips on how businesses can decide best in determining the best time to have lines of credit.

If you would consider following all of these, then you can expect your business to really go smooth and well.

Who Needs LOC?

Contrary to what a lot of people think, having lines of credit is not suited for every business in the market. Some businesses, due to its large operation, need to have business lines of credit in order to keep the business going. They need day to day cash in to sustain the large operational costs. In some companies, even though their operation is not that costly, they still need LOC when it comes to acquiring new assets, expanding the business and the like.

Businesses Best Suited for LOC

At the top of the list are the manufacturing companies. This type of business needs substantial amount in their day to day operations to get the business going. The money is used to purchase materials and pay for labor. Another industry that needs LOC is the retail business and wholesale distributors that carry extensive inventory. If a business has thousands of products in tens and hundreds of varying models, then an LOC is needed. Other examples of businesses that rely on lines of credit are distributors of medical products, pharmaceutical companies and service firms that has substantial accounts receivables to collect.

Businesses Partially Suited for LOC

Your business might not have large scale operations or you might not have substantial amount of accounts receivables, but this does not mean that you do not need lines of credit. Some firms use LOC for expansion purposes. It is a temporary means to meet a business goal. Some companies depend on LOC if they have irregular cash flow but they have fixed expenses. Other examples of companies that need temporary assistance in terms of LOC are professional service firms that depend on government payment, law firms and medical practices.

Choosing LOC

Getting lines of credit is easy if your business is stable and solid enough in the eyes of the financial institutions. You should have a well developed business plan, reasonable collateral and a strong credit. Apply in several banks so you have options to choose from. Once you have been approved by several banks, compare the interest rates they are offering you. It is in your discretion if you want a fixed credit line rate or not. Take the time to consider about the repayment terms or whether you would like to have your line of credit be converted into a normal loan right after the expiration of the terms of the credit facility. Discuss these options with your accountant so you get the best deal.

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