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. Using all the resources that are available to you as a business owner is very important in order for your business to succeed. Investments as well as loans from friends, family or other investors are some of the resources that will come in handy. These might also include lines of credit and loans achieved from banks which are viable options for starting up a small business. Lines of credit are simply finances that enable an entrepreneur to withdraw funds of a certain amount. One should pay interest on the balance in form of monthly installments.
Since they allow borrowers to use their money to serve more than one purpose, lines of credit are very flexible unlike other terms of debt. One can use it to pay up suppliers as well as covering any expenses incurred in operating the business. One can use this money to cover cash flow gaps from operations which highly benefits an entrepreneur during the start-up stage. If at all borrowers don’t use the money they have borrowed effectively, they are liable to paying both the principle and interest payments as well. In order for borrowers to get lines of credit, they require hard collateral to back them up.
Liquid collateral such as brokerage accounts, liens on real estate, equipment or CD’s are acceptable. Most banks prefer lines of credit that are secured by hard collateral since 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. The contract drafted between a lender and a borrower can allow one to access a certain amount of loan with lines of credit.
There are two kinds of lines of credit namely secured and unsecured. A line of credit that is backed by hard collateral such as a home, boat, vehicle or another form of asset is a secured one. Such loans have lower interest rates since they are less risky for the lender. 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. When one wants to fund short term needs such as purchasing inventory, buying new equipment for the business to use even covering operation expenses, they should apply for lines of credit.
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