What Are the Benefits of Having a Line of Credit for Start-ups?

Ready liquidity and good cash flow are crucial for small businesses and startups, especially in the initial stages of entering the market. However, raising funds is not an easy or quick task, and financing delays can have a serious negative impact on both short-term and long-term success.

This is where a line of credit can be extremely helpful for startup and small business owners. A line of credit works in a similar manner to credit cards and personal loans, but offers numerous benefits over traditional loan or credit solutions. Let’s look at a few ways in which a line of credit can help your business:

It Can Help with Funding Startup Expenses – Setting up a business is stressful if you don’t have capital. Since banks are wary of giving business loans to new companies, many startup owners use their savings, look for outside investors, or approach friends and family for loans. If your business is too new for large-scale capital funding, a personal line of credit can help you get started with the basics.

It Can Help You Deal with Cash Crunches – If you’re running short of cash for time-bound costs, e.g. salary payments or utility bills, a line of credit can help cover these. This is especially helpful when you can be sure of repaying the loan amount in a short period of time. For instance, if you know that a client will pay you by the end of the week, but you need to pay your supplier right now.

It Can Give You Instant Access to Funds – With a line of credit, you don’t need to wait for an investor to approve your business plan and running expenses before releasing more funds. After you have been approved for the line of credit, you can access it at need, anytime and anywhere. This is like a credit card in terms of ease of access, but without extra interest being charged on cash withdrawals.

You’re Only Charged Interest on What You Use – A traditional business or personal loan may offer an attractive interest rate, but you’re paying interest on the entire loan amount from day one, whether you use it or not. With a line of credit, on the other hand, you will pay absolutely no interest until you actually use your available credit, and then only on the amount that you have used.

There’s No Comparison in Terms of Flexibility – A revolving line of credit is definitely the most flexible solution for business financing. It gives you an alternative to bringing outside investors into your company, allows you to retain maximum equity and control, helps you avoid cash flow problems and make repayments at your own pace. Even if you don’t use it much, there’s a source of funds always available.

It Can Help You Build Your Business Credit – You’re not likely to get money from a bank until you can show growth over a certain period of time, but you need money to launch your business and run it successfully. It takes time for a startup to build a credit history, and using your personal line of credit to make bill payments on time helps you improve the new company’s credit history.

Application and Approval Process is Easier – Compared to most loan instruments, applying for a line of credit is easier and quicker. The requirements are usually quite simple, and you can fill in your details through an app or website instead of waiting in line at the bank or struggling to put paperwork together for a loan application. Approval generally takes no longer than a couple of days.

Personal loans through apps – It’s Tech-Friendly and Convenient to Use. It isn’t just the application process that becomes easier with the right technology. If you have a line of credit available through an app, you can access funds with just a few taps on your screen or keyboard. The balance limit is available 24/7, and you can choose to transfer money to your bank account or even use a virtual credit card to make payments directly from it.

About the Author:
Shiv Nanda is a financial analyst who currently lives in Bangalore and works with MoneyTap, India’s first app-based credit-line. He has made it his life’s mission to help and educate people on various financial topics. You can email him your questions at shiv@moneytap.com.

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