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When you’re running a business, you may come up against unexpected expenses or an opportunity to grow your company. But without working capital to cover those costs, it can be challenging.A commercial equity line of credit (CELOC) is one type of financing to consider, as it provides just the amount you need, when you need it.
What is a Commercial Equity Line of Credit?A commercial equity line of credit is like a loan in that it provides your business with financing. It differs, however, in how it works. Rather than receiving a large lump sum of funds, you are approved for a maximum amount and then you can take out funds up to that max at any time. You pay back and owe interest only what you have borrowed.Some lines of credit provide you with a debit card to spend the money or give you checks you can write, while others simply transfer to your bank account.A commercial equity line of credit is generally secured by the commercial property. In the event that the CELOC borrower defaults on the loan, the bank or lender can use that asset to cover the remaining balance.Lines of credit can be useful because sometimes you need some cash now and some later, particularly with something like a renovation project. You won’t have to take out multiple loans if you need more money over time; you simply borrow against your line of credit.
Types of Property for Your CollateralWhen securing a CELOC with commercial real estate, check with the lender to confirm the types of property they will accept. Generally, commercial property valued up to $5 million may be eligible. Common examples of what may be include:
- Light industrial
Pros and Cons of a Commercial Equity Line of CreditLike any type of financing, there are benefits and drawbacks to taking out a commercial equity line of credit.
ProsOne of the biggest benefits of a CELOC is that ability to have access to cash when you need it over time. Another benefit is that, while a line of credit functions like a credit card, providing you with access to revolving credit, it may have a lower interest rate than a business credit card.A commercial equity line of credit could also help you even out cash flow during slow seasons. If you know that sales grind to a halt over the summer, a line of credit could be a tool to help you keep afloat and cover your business expenses until sales pick back up again.And a commercial equity line of credit can empower you to leverage business opportunities that arise. Maybe you have the opportunity to rent the commercial space next to your shop. Without access to capital, you might not have the funds to cover the extra rent and remodels needed.If you’re looking to build your personal or business credit, paying on your line of credit on time could help you do so, as long as that lender reports to one or more personal or business credit bureaus.
ConsOn the other hand, taking out a commercial real estate line of credit or other financing could add costs to your company. The interest rate you may qualify for may be high, depending on things like your credit scores, annual revenues, value of your property, and other factors. In the case that the interest rate is high, it may not be worth it to pay that rate for access to capital, so consider whether you truly need the funding. And be sure to read the fine print: there may be extra fees, like for appraisals or late payments, that quickly rack up.Should you not pay off the loan, it could potentially negatively impact both your personal and business credit scores, which may make it difficult later to qualify for other financing. And having a large sum of money ready and waiting can be tempting. You might find it all too enticing to spend on unnecessary expenses, like a fancy espresso maker.
Commercial Equity Line of Credit UsesSo what can you use a business equity line of credit for? Pretty much anything that pertains to your business. A few examples of situations in which a CELOC could be useful:
If you are a real estate investor, a commercial property line of credit will use the property you are purchasing as collateral, helping you get a lower rate on the CELOC. And you could use a commercial property equity line of credit to cover a purchase of property or land or for remodeling expenses.
- To cover gaps in your cash flow, when you’re waiting for clients to pay you.
- To pay for a larger inventory order so that you save what you spend per item.
- For payroll, office expenses, office equipment, or remodeling.
Who is a Commercial Equity Line of Credit Good For?If you need short-term financing and expect to need funds over time, rather than all at once, a line of credit could be an option to consider. Whether you have a slow period that you need to cover expenses for or are looking for capital for a real estate investment, an CELOC provides steady access to cash that is available when you need it.
Qualification FactorsEach lender will have slightly different requirements for applicants, and some require you to be an existing bank customer for at least six months.Getting your finances in order is a good first step if you are interested in applying for small business lines of credit. Lenders may require businesses to have a certain yearly revenue or time in business, and you may be asked for your profit and loss statement, tax returns, or other financial documents.Additionally, lenders may require applicants meet a minimum credit score requirement.But one of the most important qualifications is the collateral. Generally, the higher the value of the commercial real estate you’re using for your asset, the more you will qualify for. Some lenders will determine the amount you qualify for based on the value of the property.
Where to Find a Commercial Equity Line of CreditStart simply: see if the bank you already do business with offers a commercial equity line of credit. Since some lenders require CELOC borrowers be existing customers, this may be an important consideration.But that’s not your only option. There are also lenders who specialize in commercial equity lines of credit, and some online lenders may be more willing to work with you if you have less than incredible credit. Potential borrowers with a credit score on the lower score of the spectrum may qualify for a higher interest rate.
The Application ProcessBefore applying for a line of credit, calculate how much you need, both immediately and down the road. Calculate cash flow to see how long you can operate with what you have, then determine how much you want to ask for. Keep in mind, you will be paying on your CELOC as soon as you borrow from it and freeing up more of your line, so you may not need a line of credit for as large a sum as you may originally think. A more moderate sum may suffice if you continually pay back what you’ve used and then take out more.Applications will generally ask for some basic information about both you as the business owner and the business itself, including:
If you are using your commercial property as collateral, you may also be required to provide details on it, including:
- Name, address, phone number
- Date business was established
- Employer identification number or Social Security number
- Name of all owners and their personal details
- Gross revenue
- Details on bank accounts and current loans
And then, depending on lender requirements, you may be asked to submit additional financial documents:
- Property type
- Current market value
- Loan balance if you have a mortgage on it
If you’re applying for a smaller amount, like under $50,000, you might expect a response faster, even in as little as a few hours. If you’re seeking larger amounts, it may take a few days to process your documents and come to a decision. Check with the individual lender to see what their typical timelines for approval and funding are.
- Business and personal tax returns
- Balance sheet
- Profit and loss statement
- Schedule K-1
- Personal financial statement
Finding A Commercial Equity Line of CreditIf you own commercial property and also need access to working capital, you can leverage your asset with a commercial equity line of credit. Be sure to shop around, as interest rates and terms can vary from one lender to another, based on your qualifications.
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About the Author
Susan Guillory is the President of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.