New business with a line of credit? Understand your line of credit and you’ll save yourself (and your new business) a lot of headaches. Yesterday, I mentioned some of the reasons for taking out a line of credit for a new business. Today, I’m following up with more information on managing a line of credit.
What is a line of credit?
A line of credit is a pre-set credit limit that you can use whenever you want. Lenders will usually give you a better rate if you secure it against your home or other assets, but keep in mind that you take on more risk when you put those assets up against the loan. A line of credit usually has a much better rate than a credit card does. And, unlike a regular loan, you can withdraw what you need as you need it. If you know you need $1000 a month for the next three months, you can withdraw $1000 each month, rather than having to take out a loan for $3000 at the start. That way, you only pay interest on the money you’re borrowing as you need it.
Perks for lines of credit
Many lenders offer insurance on the line of credit, so that you won’t burden loved ones if something happens to you. Depending on the line of credit you have, you can make fixed payments, interest-only payments or any amount above a monthly minimum.
Be careful with credit
Tread carefully before taking out a line of credit. You should absolutely shop around for the best deals (and best rates). Check out some loan calculators, review payment schedules, and even check out your credit score. You should also consider talking to a financial planner and account before applying. In the meantime, Wachovia has some tips for managing debt and credit and HSBC gives pointers on managing your money.
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“New business line of credit 2” from Become a Consultant Blog at ConsultantJournal.com.