Credit has always seemed like a Catch-22 to me. Starting when you are 18, you receive promotional offers in the mail to sign up for every credit card out there. If you use these cards to go into debt and pay off the debt quickly enough, you'll qualify for more..... debt. It all seems really strange when you sit back and think about it.
Enter the world of business credit products. Most types of business credit products are very different from consumer credit products because they help you expand your business faster, get a larger return on investment sooner, and use your cash for other business resources.
I sat down with Angela Buckendorf, Director of Marketing at Aztec Financial, to talk about how to properly leverage the power of business lines of credit. I learned a lot about how you can leverage a business line of credit strategically to grow your business, and you will too.
What is a Business Line of Credit?
Angela Buckendorf: About a year ago, we picked up a product called the Business Line of Credit. It works just like a credit card for your business, only it doesn't have variable rates like a credit card, so it's not going to cost you an arm and a leg. A business line of credit works off of fixed-rate draws, meaning after it's established, you go in, and you withdraw the money that you need only when you need it. There's no required usage, and there are no fees for not using it. When you use a business line of credit, it's always a fixed rate.
We let you know what the rate is upfront, and you know how long you have to pay it back. You can pay it off early if you want to with no fees, or you can wait the whole term to pay it back.
Drew Crawford: And who is a business line of credit for?
Angela Buckendorf: A business line of credit works really well for companies that work large hurricane events, contractors that work large cleaning or commercial jobs that have to buy equipment, consumables, or PPE upfront, and they are going to drop the money, work the job, and wait for the insurance to pay them back. The contractor then pays the loan. Think of a business line of credit as a short-term loan that you can pull out of the account and put money back into the account as often as you want.
Besides Restoration Contractors that are Waiting to Get Paid for A Large Job by Insurance Companies, Who Benefits the Most from a Business Line of Credit?
Angela Buckendorf: Honestly, any contractor can benefit. We don't ask what the funds are used for. You can use it for marketing, purchasing a business, to pay payroll for a month; these are funds that you can use anywhere that you want in your business. I recommend using it for travel expenses, purchasing construction materials, chemicals, other single-use items, marketing expenses, growth opportunities, or anything else that you would need money for on hand when an opportunity comes along.
Drew Crawford: What should a contractor do to ensure that they use their business line of credit strategically?
Angela Buckendorf: I would make sure that you are using it for the things that you can't use an equipment lease or loan for. There's a lot of temptation to use it to go buy a big truckmount or grinder. You should use your equipment financing for those because it will give you the longest term to pay it back, whereas your business line of credit is a shorter-term lending product. It's better for the expenses you know will be shorter-term. A business line of credit is hands down the least expensive lending product for short-term things.
For example, if you only have 12 months to pay back a truckmount on a business line of credit, you'll have a much larger monthly payment versus 5 years. It's all about managing your cash flow.
Drew Crawford: That makes sense. Who qualifies for a business line of credit?
Angela Buckendorf: We have business lines of credit for contractors that have been in business for six months or longer, and we have FICO scores of 600 or above. The only other qualification for being approved is that you have to make at least $100,000 in annual revenue or more.
Drew Crawford: And do you prove that with earning statements? What do you ask for upfront?
Angela: Yes. So we ask for your Social Security Number, your business identification number, and three to six months of bank statements.
There is one other thing that contractors should know. When we are setting everything up, there is an initial draw. It is the only time that we require a draw. It can be as low as 500 dollars. The purpose of this draw is to make sure that everything is set up and working correctly. After that, you've got a nice application on your phone so you can draw money from your line of credit whenever you need. This is money that you have to pay back, but you can turn around and put it right back in the account.
Why Don't Contractors Take Advantage of a Business Line of Credit More Often?
Drew Crawford: Why do you think contractors don't take advantage of a Business Line of Credit more often?
Angela Buckendorf: A lot of contractors don't realize that there's a better option than a business credit card out there.
Business Line of Credit Rates
Drew Crawford: Does the rate vary a lot from business to business based on their credit score?
Angela Buckendorf: It all depends on which line of credit product you choose. Rates start as low as 4.9%, way lower than the 24% rate that you get at the bank. Depending on if you want to pay it back in 12 months or 48 months, will change what your fixed rate draw is.
Aztec Financial Helps You Pick the Product and Terms that Makes the Most Sense for Your Business
Angela Buckendorf: When you apply for a business line of credit, we present you with multiple options, and we will help you with what's most important to you. Is it how long do you have to pay it back? How low is the draw-rate is on it? Is it weekly payments or monthly payments? We will give you multiple options so that you can choose what is best for your business.
Conclusion
Regardless of what time of work you are doing, it's smart to use the tools that you have available to create leverage for your business. A business line of credit is a great tool for contractors that need extra cash on-hand for opportunities that come up during storm events, large cleaning jobs, or to manage administrative costs. What will you use it for in your business?