Benefits of Lines of Credit for Small Businesses
The process of starting up and growing a small business might be very challenging for most people. 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. 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 should pay interest on the balance 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. In addition to covering any expenses that one incurs when operating the business, one can use the line of credit money to pay suppliers. Cash flow gaps can be covered using this money from any operations that one has to handle. 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.
Brokerage accounts, equipment, liens on real estate and CD’s are examples of liquid collateral that are accepted by banks. Since lines of credit that are backed up by hard collateral are less risky, most banks prefer them. 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.
There are two kinds of lines of credit namely secured and unsecured. 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.
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.