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. In order for your business to succeed, one should be willing to use all the resources that are available to them for their business. Some of the resources that will come in handy include investments and loans from relatives, friends or other investors. These might also include lines of credit and loans achieved from banks which are viable options for starting up a small business. In other words, lines of credit refer to those finances that are offered to borrowers which allow them to withdraw up to a fixed amount. 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. 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. 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. 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. 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. 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.
Those people who get lines of credit in order to open up a business get to benefit from a constant cash flow. 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.