This new financial product is helping more and more starting businesses finance the cash flow difficulties that small businesses experience when they are growing. Secured with the expected sells that you and the financial institution budget for the upcoming period, you get a line of credit or a loan for the amount you need to purchase new equipment, hire more personnel, pay for supplies, finance export and import transactions, etc.
Loans And Lines Of Credit
There are loans and lines of credit offered by this method. Loans come with fixed or variable rates and charge lower interest rates compared to unsecured loans and lines of credit. You get a fixed amount that you can repay in small installments so you can finance equipment purchases, temporary cash flow problems, pay for supplies to start up a new line of production, etc.
Lines of credit are revolving accounts that offer cash at a variable interest rate but only charge interests when you actually withdraw money from the account. In the meantime you have an open line of credit knowing that the cash is available whenever you need it. You can withdraw as much money as you need up to the pre-defined limit and repay it the way you want. Usually there are minimum payments consistent of the interests charged for the money borrowed and a small portion of the capital. Up to the credit limit you can withdraw and repay as many times as you need.
How Does It Work?
The money you request is guaranteed by the future sells of your company. Usually, credit card payment processors provide this service. Since they process your credit card sells, they can hold the funds or a portion of the funds you receive and destine them to repaying your debt. Thus, they are sure that as long as you are in business they can have some sort of control over repayment.
Of course, not all funds will be retained as you need cash to operate your company. However, the loan payments will be agreed as well as the minimum payments on your lines of credit and thus, each month, when the financial institution processes your clients payments, you will get a deduction equal to the agreed amount from your overall sells. Thus, you will not even have to worry about repayment.
This is an excellent system that provides cheap financing for starting businesses as it reduces the risk involved in the transaction for the lender. This is due to the fact that the lender can exercise some control over your sells and know exactly what your repayment capacity is. Thus, with all this information, he can decide the most suitable loan program for your business.
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