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Understanding Financing Options For Large Projects: How To Use A Line Of Credit

When the cost of a project is well known and easy to predict, the best thing to do is take out a loan that will cover the full cost of the project. This is perfect for mortgages and auto loans, but when the cost is variable things get trickier. If you are remodeling a home or building a custom home, you do not always know what the costs are going to be, and you need to have some flexibility in the money that you borrow. You do not want to have to go through several different loan applications to get the money that you need, so your best bet is to use a line of credit.

Understanding Financing Options For Large Projects

Learn about lines of credit before you begin a large project.

What is a line of credit?

A line of credit is an open ended agreement that exists between you and your financial institution that will cover the costs of a project, such as the construction of a new home. When you apply for the line of credit, you will be asked to discuss the project, why you need the money, and why a line of credit is your best option instead of taking out a traditional loan. You will then be asked to estimate what the total cost of the project will be and the best and worst case scenarios for the project. This gives the lender a good idea about what to expect will happen with their money, and it shows that you have thought through the situation.

How do you get approved for a line of credit?

After you apply for the line of credit, the financial institution will decide from one of several options. They may accept your proposal and give you what you ask for, which is the best case scenario. They may reject it and tell you to adjust your numbers and reapply, something that happens often when people apply for their very first line of credit. They may offer you a smaller line of credit. With this last option, if you make payments on the line of credit during the project you will still be able to get all of the money that you need, but it makes it more important that you manage the money carefully.

How do you use a line of credit?

Once you have been approved, you can begin making payments to vendors and contractors using the line of credit. This will allow you to get started on the project, even if you have very little idea what the total cost will be. Remember, you only have to pay back what you borrow, so, unlike a loan, you can adjust the amount that you need for your line of credit on the fly. When things come in under budget, you will not need to use much of your line of credit, so you will not have as much to pay back. If you find that your line of credit is not going to be enough to cover the entire cost of the project, you can work with your financial institution to extend the line of credit and give you access to more money. Be careful doing this, as it is very easy to let the costs get out of control and raise your line of credit to a level that will be very difficult for you to pay back.

A line of credit can make large projects affordable and give borrowers greater control over the project that a traditional loan would. If you are working on a large project, consult with your contractor to determine what the line of credit should be and how it can be used most effectively.

I am William Yarbrough, a contractor and frequent applicant for lines of credit. My business involves building custom homes on spec, and I do not always know what the costs are going to be, especially during times of the year when rain or other bad weather can delay a project. A line of credit gives me the flexibility that I need to do the work, so I wrote this article to talk about how a line of credit can help others. I use for my home construction needs, and I recommend them to anyone searching for a line of credit.

Tim Esterdahl

Tim Esterdahl is the editor of IFCS blog. He is a married father of three and enjoys golf in his spare time.
Tim Esterdahl

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