Benefits of Lines of Credit for Small Businesses
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. Some of the resources that will come in handy include investments and loans from relatives, friends or other investors. Other viable options for starting up and running a small business is by getting lines of credit and loans from banks. Finances that allow one to withdraw money of a fixed amount are referred to as lines of credit. One is only required to pay up interest on the balance which is usually done in form of monthly installments.
Unlike other debt terms, lines of credit tend to be very flexible as they allow one to use the money to serve 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. 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. 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. Most banks prefer lines of credit that are secured by hard collateral since they are less risky. There are other ways however that banks can offer financing to borrowers while 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.
One can either get a secured or unsecured line of credit. Secured lines of credit are those that borrowers back up by using assets such as a home, vehicle, boat or equipment. 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.
Lines of credit offer constant cash flow sources for those people who have opened up a small business for them to cater for all unpredictable costs. 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.