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Starting A Business

The Pros and Cons of a Startup Business Line of Credit

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Running a business certainly has its ups and downs—especially when it comes to finances. Whether you’re just starting out, sustaining, or growing an established business, you might experience a surplus one month and then dip into the red the next. So how do you manage that risk and ensure you have some financial stability to run your business effectively?

Along with a business credit card and term loans, a line of credit is definitely another option to consider. And maybe you already have—FitSmallBusiness claims that 47% of small businesses have opened a line of credit.

However, there are many misconceptions around what this product actually is. What exactly does it mean to have a business line of credit, and what are the pros and cons?

We made this comprehensive guide to help you navigate the decision of whether or not to open a business line of credit.

What is a line of credit and how does it work?

What it is: A business line of credit is “revolving” capital that works almost like a credit card, except you get access to cash and, in some cases, lower APRs.

It’s a flexible financing product that lets you withdraw funds up to a predetermined amount—this means you can withdraw funds as you need it, as opposed to receiving the full sum of the loan all at once. A business line of credit is typically used for short-term working capital needs such as inventory purchases, future project costs, or company payroll.

Where you find it: Banks can be a good place to look for credit lines, but a number of alternative online lenders might have quicker, easier application processes or line-of-credit requirements. Banks have high minimum qualifications and often require specific collateral, while online providers can be far more flexible.

To find the perfect fit and absolute best terms, you should plan to compare options between several lenders—so don’t wait until you’re desperate for capital.

What you need to provide: To obtain a business line of credit, you probably need to supply some personal and business financial information, so be prepared with income and other statements or tax returns. The maximum amount of funding available, introductory duration of the credit line, and repayment terms depend on your business’s annual revenue, credit rating, history, and other factors.

What credit lines offer: Credit lines can range from $10,000 to as high as $1,000,000, depending on your business needs and qualifications. Terms are usually annual with an interest rate based on the prime rate, plus 1% to 3%.

Interest rates vary as the market changes, of course, but many lenders let you withdraw funds—via paper check, online, check card, or other methods—for no fee or very small fees. However, you can expect to pay a modest fee to open the account once you’ve been approved. For example, you might be charged $150 for credit lines under $25,000 and $250 for larger credit lines. An annual fee is often waived for the first year, and may run $100-$150 annually thereafter. Payments are interest-only on the amount you borrow.

Now that you have an idea of how this works, how do you decide?

The pros of a startup business line of credit

  • Fast cash when you need it. A small business credit line lets you draw funds when you actually need them. This means you’re not stuck paying interest on borrowed money if you don’t have an immediate need for it. Once a credit line is established, drawing funds is usually the fastest way to access capital (aside from accessing your own cash).

  • Even out your cash flow. While every business should have a cash cushion available for times when the market is rougher, sometimes a crisis lasts longer than the money does. You can’t always predict needing an additional employee for a sales spike or being unable to pay the ones you have because a client has yet to pay you. A business line of credit helps you manage that risk.

  • Build good credit. Small businesses need to build a credit history to obtain future credit accounts and loans. Using a line of credit lets you build a positive business credit history as you use the line and make the payments on time. Businesses that use their lines of credit in a careful and deliberate manner may see their business credit rating increase, which can be helpful when seeking other loans and credit lines.

  • Build relationships with lenders. One of the best aspects of negotiating a line of credit is the relationship you build with the lender. Over time, this might help you when you need additional financing for other projects.

  • Flexibility. Lines of credit don’t always require you to provide a reason for the loan, which lets you use your credit on what your business needs on a moment-by-moment basis.

The cons of a startup business line of credit

  • Smaller borrowing limits. Credit lines typically have smaller borrowing limits than term loans, which make them ideal for unexpected charges but not for large capital investments.

  • Very new or very small businesses may have trouble qualifying. Even those small businesses that meet high qualifications for a top-tier business line of credit at a bank might find it difficult to obtain one unless they bring other business or accounts with them. This is because credit lines are less predictably profitable for lenders (compared to a term loan, for example). As such, banks can be reluctant to offer them as a stand-alone product. When you apply for a line of credit, your bank may require that your business be at least two years old. Unlike with, say, a business credit card, you might be asked to provide extensive financial reports including tax returns, cash flow statements, and more.

  • There are costs. The costs involved in establishing and maintaining a line of credit can be a drawback. Establishing a line of credit requires up-front fees to obtain the line. In addition, the business must pay interest on the money it uses from the line of credit. While you may have to pay higher interest rates on business credit cards, lines of credit can result in more fees for maintenance and withdrawals. Make sure your interest rate is low enough to justify any added fees.

  • It is, after all, more debt. This may seem obvious, but it should definitely be a consideration. When money is tight, a line of credit can create a cash infusion to a small business; but of course, a line of credit is debt that has to be repaid, which can be problematic when finances are tight. “While a line of credit is nice to have on hand for an emergency,” says TheSelfEmployed.com, “you could ultimately find that you have spent the entire amount you have access to, and are unable to repay it because of a business slowdown. In some cases, businesses may be better off with a standard loan to avoid the temptation of access to immediate cash.”

  • Higher credit risk. “A business line of credit can also put your small business at risk,” according to The Small Business Chronicle. “Even if your business fails, a line of credit is a business obligation that has to be repaid.” Personal liability to repay the debt depends on the structure of your business. For example, a sole proprietor may be liable while a corporation may relieve you from any personal obligation.

There you have it! Regardless of your business size or type, a credit line can be very helpful; but before you apply, make sure you understand the potential risks and downsides. But if your business is equipped to handle them, the benefits could far outweigh the risks and downsides. Of course, as the old adage goes, it takes money to make money!

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Starting A Business

4 Tips for Starting an Industrial Business

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The industrial sector is a broad category that covers businesses involved in the manufacturing, production, and distribution of goods. Small industrial companies are growing across the country and there are many opportunities for entrepreneurs to get involved in this sector.

As with any type of business, there are certain things you need to do to set yourself up for success. Here are four tips for starting an industrial business:

photo credit: Pixabay

1. Do Your Research

Market research means figuring out who your target customers are and what they want or need. There are a number of different ways to do this, but some of the most common include surveys, interviews, focus groups, and observation.

Surveys can give you a good overview of customer opinions while interviews or focus groups can help you to delve deeper into specific issues. Observing potential customers in their natural environment can also be helpful in understanding their behavior and needs.

2. Choose the Right Niche

When it comes to starting an industrial business, one of the most important decisions you’ll make is choosing the right niche. There are a number of factors to consider when making this choice, and it’s important to do your research before settling on a particular industry.

First, you’ll need to identify the needs of your potential customer base, such as the products or services they need. Once you have a good understanding of the market, you can then start to narrow down your options. Consider the competition in each niche and decide which one offers the best opportunity for success. When making your final decision, it’s essential to choose a niche that you’re passionate about.

3. Create a Business Plan

In today’s competitive marketplace, it’s more important than ever to choose the right niche for your industrial business. When you specialize in a specific industry or type of product, you can better meet the needs of your target market and stand out from the competition. How do you know what niche is right for your business? Here are a few things to consider:

First, think about your strengths. What does your company do better than anyone else? What unique skills or experience do you bring to the table? Use these strengths to narrow down your focus and choose a niche that you’re passionate about.

Next, consider your target market. Who are you trying to reach with your products or services? What needs do they have that you can address? When you choose a target market and understand their needs, you’ll be better able to choose a niche that meets their demands.

Finally, don’t be afraid to experiment. Trying new things is essential for any business, so don’t be afraid to test out different niches to see what works best for you. By keeping these tips in mind, you can be sure to choose the right niche for your industrial business.

Engineers work with industrial printer

4. Optimize Your Processes

Through industrial control engineering, you will be able to identify opportunities for improvement and design solutions that achieve the desired results. In many cases, these solutions involve the use of automation and other advanced technologies.

By optimizing industrial business processes, industrial control engineers can help to improve efficiency and increase productivity. In addition, they can also help to improve safety conditions by reducing the potential for accidents. As industries continue to grow and become more complex, the demand for qualified industrial control engineers is likely to increase.

Endnote

With an increased demand for industrial operations and manufacturing, there has never been a better time to start an industrial business. By following these four tips, you can be sure to set your business up for success.

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Starting A Business

How to Find the Right Business Coach — and Avoid the Wrong One

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At its best, business coaching can connect you with a mentor and supporter who helps you generate ideas, make plans and execute on them.

But at its worst, a business coaching offer can cost you time, energy and money — without much to show for it.

Here’s what to expect from a business coach, how to find a coach that suits you and how to spot red flags.

What a business coach can do

Business coaches draw on their professional experience to help you set and achieve your own business goals.

“I’m here to help you, and I’m here to raise your level of knowledge in whatever way I can,” says Gary Robinson, who chairs the Memphis, Tennessee, chapter of SCORE. SCORE offers free business mentoring for entrepreneurs nationwide.

Some ways a business coach or mentor might do this include:

  • Offering feedback on your ideas and suggesting new ones.

  • Giving you templates and other tools that help you make plans.

  • Connecting you with resources in your region or your industry.

  • Giving you deadlines and holding you accountable to them.

Some business coaches may also offer coursework or group training sessions on particular topics, like sales.

Working with a coach should help you identify opportunities you hadn’t seen before or develop new strategies for pursuing those opportunities, says Sophia Sunwoo, who coaches women and nonbinary entrepreneurs through Ascent Strategy, her New York City-based firm.

“[Coaches] don’t necessarily have to have all the answers,” Sunwoo says. “But they are the people that know how to maneuver and create a bunch of different thinking paths for their clients.”

What a business coach can’t do

A business coach isn’t the same as a consultant, whom you would hire to perform a specific task. A coach or mentor could look over your business plan, for example, but they wouldn’t write it for you.

“If you were to hire me as a consultant, you would expect me to roll up my sleeves and pitch in and work with you to get things done, and you would pay me for that,” Robinson says. Coaches, on the other hand, “try to show you how to do things so that you can do them [yourself].”

Business coaches are also not therapists, Sunwoo says. Entrepreneurship can be emotionally and mentally taxing, but it’s important that coaches refer clients to mental health professionals when necessary.

Business coaching red flags

If a business coaching opportunity “promises guaranteed income, large returns, or a ‘proven system,’ it’s likely a scam,” the Federal Trade Commission warned in a December 2020 notice.

In 2018, the FTC took legal action against My Online Business Education and Digital Altitude, which purported to help entrepreneurs start online businesses. The FTC alleged these companies charged participants more and more money to work through their programs, with few customers earning the promised returns.

In both cases, these operations paid settlements, and the FTC issued refunds to tens of thousands of their customers in 2021 and 2022.

To avoid offers like these, the FTC recommends that you:

  • Be wary of anyone who tries to upsell you right away or pressures you to make a quick decision.

  • Search for reviews of the person or organization online.

  • Research your coach’s background to see if they’ve accomplished as much as they say.

Sunwoo says to also be skeptical of one-size-fits-all solutions. A coach should customize their advice to your personality and skill set, not ask you to conform to theirs.

“The moment that a business coach pushes you to do something that is really not compatible with your personality or your beliefs or values,” Sunwoo says, “that’s a huge problem.”

How to find the right coach — maybe for free

Here’s how to find a coach that will be as helpful as possible.

Determine whether you need advice or to hire someone. A coach isn’t the right fit for every business owner. If you need hands-on help organizing your business finances, for instance, you may need a bookkeeping service or accountant. And take legal questions to an attorney.

Seek out the right expertise. A good coach should be aware of what they don’t know. If they’re not a good fit for your needs — whether that’s expertise in a particular industry or a specialized skill set, like marketing — they might be able to refer you to someone who’s a better fit.

Consider free options. There may be some in your city or region:

  • SCORE offers free in-person and virtual mentoring in all 50 states, plus Guam, Puerto Rico and other U.S. territories.

  • See if your city has a Small Business Development Center, Veterans Business Outreach Center or a Women’s Business Center. All are funded by the U.S. Small Business Administration and offer free training and advising for entrepreneurs.

  • Do an online search for city- or state-specific programs. Philadelphia, for example, offers a business coaching program designed for entrepreneurs who want to qualify for particular business loan programs. Business incubators often offer courses or coaching.

Make sure your coach is invested in you. They should take the time to learn about you, your business and its unique needs, then leverage their own experiences and creativity to help you.

“I’m on your team now,” Robinson says of his clients. “Let’s do this together and make this a success.”

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Are There SBA Loans for the Self-Employed?

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Many of the same SBA loans are available to both self-employed people and more formally structured businesses, such as limited liability companies and corporations. However, self-employed individuals, like sole proprietors and independent contractors, might face a higher barrier to entry for having limited credit history, inconsistent revenue or no collateral. If they can’t qualify for an SBA loan, other business financing options are available.

Who qualifies as self-employed?

Sole proprietors, independent contractors and partnerships all fall under the self-employed category. In these cases, there is no legal distinction between the business owner and the business itself. Sole proprietors, for example, are solely responsible for their business’s gains and losses, while LLCs and corporations are legally distinct from their owners. This distinction helps protect the owners’ personal assets if their business runs into legal or financial issues.

Are self-employed SBA loans hard to get?

While a sole proprietorship is much easier to set up than an LLC or corporation, lenders may be more hesitant to finance them for a few reasons:

  • Self-employed business owners are legally responsible, as individuals, for any debt and liabilities that their businesses take on. If someone sues their business, for instance, their personal assets — not just their business — could be at stake. This makes it riskier for lenders to finance them.

  • Sole proprietorships and independent contracting businesses may have lower revenue or less collateral to offer since they’re often a business of one. This could make it more difficult for them to prove that they can pay back the loan, plus interest. And it may require more paperwork.

  • Some banks set lending minimums that surpass what a self-employed business owner is looking for, either because the business owner doesn’t need that much funding or doesn’t qualify for it.

  • Since there is no legal distinction between the self-employed business owner and their business, they may lack business credit history. To establish business credit, you’ll want to register the business, obtain an employer identification number and open a separate business bank account and credit card to keep your business and personal finances separate.

SBA loans for the self-employed

SBA microloan: Best for small loans and more lenient requirements

Applying for an SBA microloan is a great option for self-employed business owners, especially if they’ve been turned down by traditional banks and don’t need more than $50,000 in funding. In fact, the average SBA microloan is around $13,000, according to the SBA. SBA microloans are administered by nonprofit, community-based organizations that can also help train applicants in business practices and management. And because the loans are small, the application process may be easier — applicants may have limited credit history and typically don’t need as high of a credit score as they do for an SBA 7(a) loan.

SBA 7(a) small loan: May not require collateral

Funds from the SBA’s most popular 7(a) lending program can be used for a variety of business-related purposes, such as working capital or purchasing equipment. While the maximum SBA 7(a) loan amount is $5 million, SBA 7(a) small loan amounts don’t exceed $350,000. And if the 7(a) small loan is for $25,000 or less, the SBA doesn’t require lenders to take collateral.

SBA Express loan: Best for quicker application process

SBA Express loans are a type of 7(a) loan for businesses that need quick financing and no more than $500,000. The SBA responds to these loan applications within 36 hours as opposed to the standard five to 10 days, which may speed up the process for borrowers working with non-SBA-delegated lenders. Additionally, borrowers might not have to fill out as much paperwork — the SBA only requires Form 1919. Beyond that, lenders use their own forms and procedures.

SBA loan alternatives

Online lenders

Self-employed business owners turned down for SBA or traditional bank loans may be able to qualify for financing with an online lender. These lenders offer options such as term loans and lines of credit, and they often process applications faster and have more lenient requirements. However, applicants should expect to pay significantly more in interest than they would with an SBA loan.

Business credit cards

Not only can business credit cards help build your business credit history and pay for everyday business purchases, but they can also help finance larger purchases (within your approved credit limit). And if you qualify for a credit card with a 0% introductory APR offer, you’ll have multiple months to pay off the balance interest-free. Just make sure you’re able to pay off your purchase before the intro offer ends and a variable APR sets in.

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