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. However, one can do it successfully with the right kind of preparation and planning as well. 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. Other viable options for starting up and running a small business is by getting lines of credit and loans from banks. 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. 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.
Most banks accept liquid collateral such as CD’s, liens on real estate, brokerage accounts and equipment as well. Since lines of credit that are backed up by hard collateral are less risky, most banks prefer them. 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.
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. Since unsecured lines of credit are not backed by collateral, banks charge higher interest rates on them.
Those people who get lines of credit in order to open up a business get to benefit from a constant cash flow. 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.