A line of credit is an arrangement between a financial institution and a customer that allows the customer to borrow within a maximum designated amount for any designated purpose mostly of business nature. The criteria and the policies that guide the line of credit between the two parties should be agreed upon at the beginning, and having established such a credit line will usually result in a long-lasting mutual relationship between the lender and the borrower. While there are certain disadvantages when working through a line of credit as against obtaining a bank loan, there are many advantages offered by the same to the customers. Thus, this article will discuss the advantages of securing a line of credit when doing business in turbulent times.
A ready source of financing
When a business or a person manages to secure a line of credit, the maximum amount designated for borrowing need not be withdrawn at the beginning. This is in contrast to when borrowing a loan where the entire amount needs to be withdrawn or ‘borrowed’ at the beginning itself. Therefore, the business or the person does not have to pay interest for the remaining amount following making a borrowing as against having to pay interest for the whole amount when obtaining a bank loan. Thus, the line of credit may be designated as a ready source of finance for a business or a person as and when the need arise.
Securing a line of credit would mean that the business or the person can be flexible when making financial decisions as the line of credit is not established based on a designated cause. Therefore, it is not necessary for a business to determine what they do with the line of credit at the time of securing the same as against the process involved when securing a bank loan.
Receiving expert advice
Banks or other financial institutions that offer lines of credit are experienced in financing and strategic planning of business practices as well as recognizing and advocating on market trends and sound financial management. Therefore, securing a line of credit not only gives the business the necessary financial strength without having to deplete its cash reserves, but also gives the business the opportunity to make use of the valuable experience and advise offered by the financial institution with regard to maximum utilization of the available funds.
In some instances, it is not only the primary business that would benefit by the line of credit but the partners whom are associated with the business would also enjoy the ability to borrow through the line of credit based on the agreements made with the financial institution.
Ability to weather tough times
Securing a line of credit during the good times in business practices enables a business to navigate safely when a businesses environment turns bad. In such instances, it may be difficult for a business to obtain credit from lenders although an already established credit line would persist throughout good and bad periods allowing the business enough finances to weather the turbulence.
Building a business network
In addition to the above advantages, the mutual or reciprocal business referrals made between the lender and the borrower are also a characteristic feature of an established line of credit. In some instances, banks may actively promote networking between their customers and industry clients as they allow their borrowers to do their businesses in a better environment.