Line of Credit

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Reserve Line of Credit

A reserve line of credit is a very important financial tool that every business owner should be aware of and take advantage of.

A reserve line of credit is simply a line of credit that you take out so you will have financing available in an emergency situation. A reserve line of credit is like the extra credit card that many people get but only use in emergency situations. It’s there to use in unforeseen emergencies where extra money is needed immediately.

A business that sets up a reserve line of credit beforehand can keep operating even if cash flow stops. A reserve line of credit can allow a business to replace or repair necessary equipment or to replace inventory in an emergency situation. Having a reserve line of credit can be critical to the survival of a business.

Why You Need a Reserve Line of Credit

There are many reasons why a business needs a reserve line of credit. The first is obviously for emergency situations where repairs or replacement of equipment is needed right of way.

If your business’s stock or equipment is destroyed or damaged in a disaster or a fire it might take days, weeks or even months for insurance to pay for the loss. If a reserve line of credit is available you’ll be able to pay for the repairs or the replacement of the lost goods immediately with the reserve line of credit. Then use the insurance payment to pay off the reserve line of credit balance later on.

Another reason might be if your business’s cash flow won’t cover the cost of needed repairs or new equipment. Insurance won’t pay for such an emergency but a reserve line of credit can and will.

Finally, a reserve line of credit can cover costs such as employees’ salaries, rent or mortgage payments, equipment lease payments and inventory replacement in the event of low cash flow. Having a reserve line of credit available can help you survive such a predicament without resorting to high interest forms of credit.

Reserve Line of Credit Benefits

The best thing about a line of credit is that a business does not have to pay a line of credit off if they don’t use it. Payments are only due on a line of credit when it is actually used.

Another advantage to a line of credit is that it is available as long as the credit is not used up. This means that the reserve line of credit can sit unused for months or used until it is necessary.

A good way to think of a reserve line of credit is an insurance policy. The business takes it out in case of emergencies but only uses it when it is necessary.

By opening a reserve line of credit beforehand, a business can secure future emergency funding at a lower cost. Opening a low interest line of credit when business is good and credit ratings are high can ensure that low interest funding is available in the future.

The Best Reserve Line of Credit

The lowest interest reserve line of credit a business can find is an equity line of credit on real estate the business owns. If the business has equity (value in excess of the mortgage) on a piece of real estate it should be able to get an equity line of credit. This will be the cheapest and most flexible line of credit that a business can get.