If you are an entrepreneur, you are likely to have encountered situations when your start-up is in urgent need of financing. Well-established businesses also occasionally have unplanned expenses and experience late payment of invoices resulting in lower available cash flow. In such scenarios, a new source of financing may be the only difference between your enterprise failing or surviving. Business lines of credit are one such financing option and here is further insight into it.
What Is a Line of Credit?
A line of credit primarily refers to a prearranged amount of money that you are allowed to borrow at your convenience. The ability to access the funds on demand and the variety of ways you can use it to sustain your business makes it one of the most flexible sources of financing. It broadly exists in two forms; a secured line of credit and an unsecured line of credit. It is normally obtained from banks and other types of lenders, such as credit unions.
Secured Business Line of Credit
In secured lines of credit, the creditor asks for some form of security or assurance from the borrower. The borrower may choose to commit his/her assets or invoices as collateral. In case the debtor defaults in reimbursing the line of credit, then the creditor is compensated using the pledged asset.
Unsecured Business Line of Credit
In unsecured lines of credit, the borrower is not obligated to commit his/her assets as collateral. Debtors often prefer it as they do not stand to lose their assets upon defaulting payment. However, since the creditors are risking a lot more, they often have stricter qualifications and charge higher rates of interest.
How Does It Work?
Upon qualifying for a line of credit, you are given access to a fixed amount of money. You can choose to make any amount of withdrawals as long as it does not exceed the allocated amount. Interest is only charged on the amount you withdrew. Upon reimbursing the amount, you are again allowed to borrow up to the given maximum.
Where Can You Use Funds Obtained From It?
A line of credit may come in handy when hiring new staff to meet an increased demand in your business. It may also be utilized in buying new equipment to keep up with emerging trends. It can further be used when buying extra stock in preparation for a future rise in demand.
By understanding what line of credit is, how it works and where the funds can be used, you get to know how vital it can be to your business.