A business line of credit is a kind of loan you can take out to fund various business endeavors and operations. Here are four things you should know about lines of credit.
1. What They Are
Business lines of credit are flexible funds you have access to whenever you need capital for your business operations. You decide on a set amount of money you’ll be able to access with your lender, and then withdraw funds up to that amount as needed. You will also only accrue interest and need to make payments on your business line of credit if you withdraw funds, like a credit card rather than a traditional loan.
2. Who Qualifies
It’s possible for any business to qualify for a line of credit, but there are certain factors you should take into account before applying for one. If your business is well-established and has a good credit history, you should be able to apply for a medium-term line of credit, whereas new businesses or those still establishing or improving their credit histories would be more qualified for short-term lines of credit. Make sure you can provide records of your business’s credit history, annual revenues and expenditures when you apply.
3. Secured and Unsecured
There are two main ways to take out credit lines. You can either apply for unsecured lines of credit or secured ones. Unsecured lines of credit are riskier for the lender, because none of your assets will be put up as collateral. For example, you may want to take out an unsecured line of credit to finance an expansion to your business. You likely don’t have anything to offer as collateral, so your lender must rely on your expansion to go well so your future revenues can be used as repayment. By contrast, a secured line of credit, such as an auto loan or a mortgage, utilizes the applicant’s assets as collateral in case he or she defaults on the loan, which makes it a much safer and more reliable transaction for the lender. Because of their risky nature, unsecured lines of credit tend to have higher interest rates than secured lines of credit do.
Because they are open-ended loans and can generally be used to fund nearly anything business-related, business lines of credit can be quite useful for various financial needs. In particular, if you’re working on a series of projects or long-term operational changes, the less restricted terms of a business line of credit may work better for your needs than those of a traditional loan.