The Relationship Between Startups and Lines Of Credit

The global economy is reliant on entrepreneurial skills that lead to successful startups. However, most of these brilliant ideas need a capital injection to facilitate productivity. Most entrepreneurs result in financial borrowing under amicable terms with the primary lending institutions such as banks. In recent times, there have been new trends such as seeding and crowdfunding which we shall further elaborate in detail.

Common Misconceptions

Most entrepreneurs have brilliant business plans which leads to a very common translation regarding business lines of credit – that it guarantees the awarding of a loan. At times it is easy to forget that banks and other lending institutions are a business in their own right, and therefore, they largely scrutinize any business idea before making a vital ‘yes or no’ decision. A simple or sophisticated business idea is not enough because these lending institutions try to find a balance whereby the business has to be flexible enough to withstand harsh times, such as when the political atmosphere, is in turmoil, for instance. Politics and socialism play a heavy part in deciding whether some business ideas can/will really take off as expected. In other instances, religion can have a large influence, take, for instance, starting a pork processing plant in a country where there is a heavy Islamic presence, does not seem like a viable option that guarantees a smooth cash flow. So, as you can see, it is more, by and large, a matter of guarantee! What does this startup guarantee in terms of reported earnings in the coming financial year? Will the startup help us as a bank, recoup our investment in the short term or long term?

How Does a Line Of Credit Work?

[p]A line of credit is a ‘package’ where the agreement is already pre-determined by the lending institution and there are strict terms and conditions where you can withdraw money as you pay charges on the outstanding balance. The only way to fulfill the terms of the agreement is to make periodic payments such as a percentage of the profits or operating income. A line of credit is particularly useful when plugging the deficit in operating expenses or even paying suppliers.[/p]

How To Raise Startup Funds

Startups raise funds via a process called seeding. It is whereby they look for potential investors who can contribute a specific amount in return for an equitable stake in the company or organization. Usually, when it comes to lines of credit, the first person you look up to is the founders, after which comes the friends and family. Once there is still a deficit, the management then looks for an institutional investor who is capable of pumping millions of dollars. A post seeding phase is necessary especially when you anticipate the costs and expenses. These processes are particularly advantageous considering they help boost the overall financial valuation of a company thanks to the amount of money that has been pumped in to help it take off. If you want more insight on how to raise startup funds, then you can review the site on how it elaborates on the business lines of credit.

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