Benefits of Lines of Credit for Small Businesses
Most people find it very hard to start up and run a small business as it is a lot of work. 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. 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 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. 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. However, banks deem lines of credit as very risky since they may term it out and repay by interest payments and principal for a given period of time if the money isn’t used properly. In order for borrowers to get lines of credit, they require hard collateral to back them up.
Brokerage accounts, equipment, liens on real estate and CD’s are examples of liquid collateral that are accepted by banks. 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. A borrower can be able to access up to a certain amount with lines of credit as stated in their contract with the lender.
There are two kinds of lines of credit namely secured and unsecured. 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. Banks prefer giving secured lines of credit since they are less risky as compared to unsecured ones. 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. Those people looking to open up a small business should apply for lines of credit in order to get cash to fund their short-term needs.