Significance of Business Lines of Credit
A lot of input is required when one wants to start up and run any kind of business making it a very challenging process. In order to succeed, one needs preparation as well as planning. It is important for a business owner to use all the resources at their disposal for their business to succeed. One should gather resources in form of loans and investments from relatives, friends or even colleagues. One can also get financing in form of lines of credit and loans from financial institutions such as banks that are important for starting up a small business. Lines of credit are simply finances that enable an entrepreneur to withdraw funds of a certain amount. One can pay for the interest that has accrued on the balance simply by giving monthly installments.
Other debt terms aren’t as flexible as lines of credit since these loans allow people to use the money for more than one purpose. This money can also be used to pay suppliers in addition to using it for expenses on operations. A new entrepreneur in their start-up stage is able to benefit a lot from this money as they can cover any cash flow gaps. Most banks find lines of credit very risky as borrowers may term it out and repay for a certain period of time if they don’t use the money properly. This is why lines of credit set aside for those starting up a business need hard collateral.
Liquid collateral such as brokerage accounts, liens on real estate, equipment or CD’s are acceptable. Lines of credit that are secured fully by hard collateral are what most banks prefer as they are less risky. For those who cannot afford to provide hard collateral, there are other ways in which banks can offer financing to them while still protecting their investment. With lines of credit, a borrower can only access up to a certain amount as stated in the contract between the lender and contractor.
Lines of credit are divided into two categories which are unsecured and secured lines of credit. A secured line of credit is one that is backed by hard collateral such as a vehicle, boat, home or any other kind of asset that one has. Secured lines of credit tend to have lower rates of interest as they are less risky for banks. Unsecured ones on the other hand are not backed by collateral hence have higher interest rates than secured lines of credit.
Getting a line of credit when starting up your business will come in handy as it will help you get a constant cash source to handle all the unpredictable costs that one incurs. Lines of credit are the best kind of finances to fund short-term needs such as buying new equipment for your business, paying for operating expenses as well as purchasing inventory.
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