(The topic of this Sponsored Post, a Small Business Line Of Credit and what it may be able to do for your franchise business, from Financing Solutions, is worth a read.)
You have already done the hard work. You bought your franchise, but like all good businesses, there are ups and downs…especially when it comes to cash flow. Maybe you’re even ready to open another franchise.
With that being said, is small business line of credit the right type of financing for your franchise/small business? Let’s find out.
In this post, I’m going to go over:
- What is a Business Line of Credit (LOC)?
- Why would you want a line of credit for your franchise?
- Where should you go for a business line of credit?
- Other benefits of a credit line
What Is A Small Business LOC?
A business LOC is an agreed amount of money that you can have access to during a specified period of time. Credit lines are often set up by small business owners for emergencies or opportunities that come up. The funds are often unrestricted meaning that you could use the funds for whatever you feel is necessary.
Why Should You Look Into A Business LOC For Your Franchise?
Unlike other types of financing for your franchise, a line of credit is pre-approved so you can have immediate access to cash. A regular business loan or an SBA loan takes months to get in place requiring lots of planning and time.
Many business owners have a line of credit for their business for emergencies such as when important equipment needs to be repaired or replaced. There is a multitude of emergencies that can come up that could happen at any time. Credit lines are most often used when cash flow is down and payroll has to be paid.
A line of credit could also be really valuable when there is a new opportunity where time is of the essence. With franchises, a credit line can come in really handy when you see the chance to buy another existing franchise where the owner wants out now.
Another opportunity could come up where you get a chance to buy something at a dirt-cheap price. Having a LOC could really be the difference in you taking advantage of unexpected opportunities.
Where To Go For A Business Line Of Credit
A bank is always the first place businesses will turn to for a line of credit. There are some advantages and disadvantages when working with a bank.
The advantages are that in general, bank LOC are inexpensive but that does depend on how much you plan on using it. If you plan on using your line often then a bank is the place to turn to.
If you don’t plan on using your line much then a bank could be more expensive. Banks will charge you an application fee and a yearly maintenance fee regardless if the line is used.
The disadvantages are that a bank credit line will require collateral and a personal guarantee which can be tough to have. In addition, getting a credit line in place will take months to set up.
A bank will be looking for you to have at least a 700 credit personal credit score and enough assets to back up the credit line. With a personal guarantee, you will be pledging your personal assets which will mean that if your business fails then those assets, like your house, will be forfeited. Also, a spouse will be required to sign the LOC if they are on the deed for any of the pledged property.
Over the last few years, a number of companies are now competing with banks and offering business credit lines with no personal guarantees. These lines can be cheaper than a bank line and are easier to get in place.
Why are alternative lenders willing to work with a franchise? Alternative lenders have learned that a franchise owner will not default so the line’s offered are now easier and cheaper than most banks
Other Benefits Of A Small Business LOC
The other benefits of a LOC is unlike a home equity line of credit, the interest or fees can be written off on your taxes.
Setting up a line allows you to act fast and sleep well at night. You will know that if something comes up, you can weather the storm. A good business person is someone who doesn’t wait for something to happen. They plan.
There is a variety of financing for your franchise. A business LOC is for when your franchise is already operating. It is a great cash back up plan and the time to get it in place is when you don’t need it.
(Written for The Franchise King Blog by Stephen Halasnik, Managing Partner of Financing Solutions. They are a leading provider of LOC’s to businesses.)