Why Lines of Credit Are Essential for Small Business Owners
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. 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. 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.
Since they allow borrowers to use their money to serve more than one purpose, lines of credit are very flexible unlike other terms of debt. One can use it to pay up suppliers as well as covering any expenses incurred in operating the business. 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.
Most banks accept liquid collateral such as CD’s, liens on real estate, brokerage accounts and equipment as well. Lines of credit that are secured fully by hard collateral are what most banks prefer as 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. The contract drafted between a lender and a borrower can allow one to access a certain amount of loan with lines of credit.
Lines of credit are divided into two categories which are unsecured and secured lines of credit. 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. Higher interest rates are charged on unsecured lines of credit as they are not backed by collateral.
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.