What is Line of Credit
It’s a normal question regarding shelf corporations and many people are found inquiring about shelf corporations with line of credit or business credit. Let’s try to understand about line of credit in an easier way.
It’s a definite borrowing limit. If lays limit compulsion on the borrower to borrow money. The borrower can take loan until the limit is met or exceeds. So in simple it is a preset borrowing limit that can be browed.
Line of credit is the threshold amount of money that bank or any other financial organization is willing to give you as a loan. You can draw that amount as the line of credit when required. You’ll obviously have to pay back the amount as a loan along with the interest. Being thoughtful, here arise a question that, then what’s the benefit of having line of credit? So it makes certain the availability of the loan. The threshold amount of loan is decided upon various factors.
Line of Credit vs Loan
Line of credit is similar to loan but it also has dissimilarities as well at the same time. In conventional loan you have to pay interest on the entire loan amount but in the case of line of credit, you have to pay the amount you have withdrawn from account. Now you only have to pay loan on the amount you have withdrawn. For example you have taken 100,000 $ loan and you have withdrawn 10,000 $, then you only have to pay interest for the withdrawn 10,000 $.
The convenience of line of credit
Line of credit is the availability of funds to be borrowed. You’ll have to return the amount you have withdrawn from the available amount. The beauty of line of credit is that once you return the loan then it once again becomes available to you. It’s very lucrative for any business growth, it depends upon your past record of loan payback. Once you pay back the loan in due time, it becomes available once again.
To whom is it beneficial?
As we have learned earlier in the definition that we can have money in the form of loan from line of credits, however both of these things have difference but you get money but both of the ways. Line of credit is easy and very flexible for small business owners. The loan seems intimidating to the small business owners. You can invest a chunk line of credit that you think will be easy to return later on.
What is the difference between a secured and unsecured line of credit?
The secured line of credit is secure for the lender because the beneficiary has to put some valuable collateral in return to get Line of Credit. It can be the inventory of the beneficiary company, machinery or some equipment.
Lenders prefer secured line of credit because they have credibility that their amount is secure. Secured line of credit is safe and reliable for both the stakeholders because both of them are at mental peace. In case the beneficiary is unable to payback then he has something to give in return.
Same is the case with the lender, as they have something collateral against the line of credit they have provided so this is a win-win situation for both of the entities. The unsecure line of credit is risk for both the stakeholders. The lender and the borrower both are at the verge of the risk.
Many businessmen want to acquire an aged shelf corporation because they have temptation to be benefitted with line of credit. It’s not a good approach to acquire Shelf Corporation so that you become eligible for line of credit.
In case the aged corporation has hidden debts and liabilities, this situation can be frightening for the beneficiary and it happened when the purchase is not made through a reliable vendor. That’s why it’s better to refrain from acquiring aged shelf corporations just to be benefitted with lines of credit.
Advantages of Shelf Corporations with Line of credit?
As we know line of credit is different from conventional lone. We have a certain available amount of business credit but we withdraw and use as per our needs and requirements. Business line of credits better suits small businesses for various reasons.
In case a small company has got a big order and they are facing shortage of funding to import raw material then under such situations line of credit comes in handy and it solves this issue.
Let’s discuss another case, you might be running a seasonal business that either experiences boom in winter or summer but rest of the year everything is normal. In such a case business line of credit saves the day.
It helps to maintain the production line of the product to meet the requirement of the seasonal product and then it becomes easier to meet the seasonal requirement of the product. So it has a lot of benefits if utilized properly.
Disadvantages of Line of credit?
Apparently it looks to be very beneficial and easy to use but if dive into the minutest details. One of the biggest disadvantage is the desire to spend money as line of credit is available out there. If it isn’t utilized properly and misused then it will max out.
Business owners love line of credit because it is flexible, but it must kept in mind that if it isn’t cleared timely then interest can pile up an create complex situations.
We must not fanaticize the flexibility that comes with line of credit because the lender can revise and change the limits and interest rate. It operates under different terms and conditions as compared to Loan.