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. With the right planning as well as preparation, one can successfully start up and run their own business. In order for your business to succeed, one should be willing to use all the resources that are available to them for their business. Investments as well as loans from friends, family or other investors are some of the resources that will come in handy. These might also include lines of credit and loans achieved from banks which are viable options for starting up a small business. Finances that allow one to withdraw money of a fixed amount are referred to as lines of credit. One can pay for the interest that has accrued on the balance simply by giving 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. This money can also be used to pay suppliers in addition to using it for expenses on operations. Cash flow gaps can be covered using this money from any operations that one has to handle. 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. 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. Lines of credit that are secured fully by hard collateral are what most banks prefer as they are less risky. 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.
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. Unsecured ones on the other hand are not backed by collateral hence have higher interest rates than secured lines of credit.
Lines of credit offer constant cash flow sources for those people who have opened up a small business for them to cater for all unpredictable costs. 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.