In past articles, I’ve shared why a line of credit can be a great growth tool for any business, and compared the benefits of using a line of credit instead of a credit card. Business Bank of Texas offers several different types of lines of credit to business owners, including accounts receivable, inventory, and guidance lines of credit. Today let’s examine what a guidance line of credit is, and the appropriate use of one.
What is a guidance line of credit?
A guidance line of credit serves as perpetual approval for a predetermined period of time, which is usually a year or less. It’s a commitment from the bank to finance assets such as real estate, equipment and other fixed assets. When a business secures a guidance line, the bank has approved credit for the customer, who can use it as needed at any point throughout the year when they find the right equipment or property.
The “guidance” part of a guidance line of credit refers to the terms under which the line is approved, including the down payment, the rate of interest, and how long the bank will finance the fixed asset. Each time a business owner draws on their guidance line, it has to meet these terms, but they can be assured that they have access to those funds when the time comes to make a purchase.
Think of it as similar to getting pre-approved for a mortgage; a homebuyer who goes through the pre-approval process doesn’t always necessarily know which house they will want to purchase, but they plan ahead and secure approval so that they know they can act quickly when they find the right home.
Similarly, a well-organized business owner looking forward to the next year of growth may identify the large fixed assets they’ll need to acquire in order to maintain growth. While they may not know exactly which property they’ll purchase, or which equipment vendor they’ll use, they can know that they have access to financing for their large purchases in the immediate future.
Who is a good fit for a guidance line of credit?
A guidance line of credit is a great choice for business owners who determine in their annual planning process that they’ll need to make some large equipment or real estate purchases in the coming year. These businesses may decide that they want the certainty of knowing they have access to financing for these purchases before they’ve even determined which equipment or property to purchase. Going to the bank and getting that approval at the beginning of the process allows these businesses to shop around and compare prices, while knowing that they can purchase these assets when the appropriate time presents itself.
This type of line of credit is a strong fit for manufacturers, doctor’s offices, or any business with a fleet of trucks or cars. For these types of businesses, periods of growth- such as adding another branch, building a new plant, or buying or replacing vehicles- require making several large or expensive purchases in a short period of time. Instead of asking for one lump loan, or applying for individual loans for each piece of equipment they need to buy in this period of growth (which would quickly become prohibitively time-consuming), they’ll simply secure a guidance line of credit. This provides the peace of mind to know that their credit is strong enough to access their funds as they need them, provided that their purchases meet the terms of the guidance line.
An additional benefit of a guidance line of credit
While the obvious benefits of a guidance line of credit should be clear by now, there is another factor of this type of financing that makes it an attractive option: the relationship with your banker. As bankers, we are excited when a Business Bank of Texas customer plans ahead and applies for a guidance line of credit, because it allows us to be involved in the planning process. This makes us better able to support business owners by giving input and ideas to help them accomplish their goals. The banking relationship is strengthened by the transparency of the planning process, and business growth is made considerably smoother due to close communication about financing needs as they arise.
At Business Bank of Texas, we pride ourselves on our strong, supportive relationships with business owners (see stories from some of our customers here). We’d love to speak to you about how we can help you reach your business goals using a guidance line of credit or other forms of financing. Please don’t hesitate to contact us with any questions.
If you’re interested in learning more about business borrowing, take a look at this resource we’ve created for business owners: