Facts on Business Lines of Credit
Each and every small business owner faces a situation in which they might need to access additional capital quickly, and for most businesses, the best option is to get a business line of credit. A business line of credit is a loan that can give a business owner access to a fixed amount of money that can be used to meet the day-to-day business needs according to their need for money.
LOCs are designed to aid businesses to finance short-term working capital needs like buying inventory or repairing equipment, making payroll and financing marketing campaigns and there are two kinds of lines of credit that are: secured business lines of credit or unsecured business lines of credit. Secured business lines of credit the business has to pledge some assets like collateral so that they can secure the loan and since the credit line is a short-term liability, the lenders normally ask for short-term assets like inventory and accounts receivable to secure the line of credit. The lenders normally do not need capital assets like property or equipment to secure the line of credit, and if the borrower is unable to repay the loan then the lender assumes the ownership of any collateral, and they can liquidate them to clear the balance.
Unsecured business lines of credit do not need assets like collateral that makes it more popular among business people. The fact that there is no collateral needed means that there is a higher risk to lenders so for a business to get an unsecured line of credit they need a stronger credit score and a positive business performance and the othe thing to note is that interest rates are higher and the amounts are smaller.
When the person opens a line of credit, they will have to receive access to a fixed amount of money to use as needed and the person will receive the monthly invoice reflecting the credit amount they have used and the accruing interest charges. It is good to note that the payment is based on the actual interest accrued on such funds while they use them and once the funds are repaid the amount is available when they need it, and they are only charged interest on the loan amount that they actually use.
Lines of credit rates and the limits set lenders and are based on the risk grade of the person, the collateral, and any servicing needs and the risk category is judged on factors like the financial success of the business, the business and personal credit scores, the state of the corporate sector overall and if the person has any collateral to offer.