Lines of Credit
A line of credit is a flexible financing option that can be used on an ongoing basis until you close the account. Borrow up to your approved limit, then as you pay down the balance you’ll open up funds from which you may borrow again.
Overview
A line of credit works much like a credit card. The borrower can take as much or as little from the account as they need, but unlike a credit card, a business line of credit can come with lower interest rates and better terms. Once the balance is paid down, funds can be extended to the business again. One great advantage to a line of credit over long-term financing or hard money loans is that interest is charged only on the amount borrowed and not on the total available credit limit.
Why Choose Credit?
With a traditional bank loan, a lump sum is given to the borrower, who then must pay the principal and interest on that amount. If the borrower takes more than they need, the entire loan must still be repaid. In many cases, there are penalties for early repayment. So, even if there’s excess money from the loan, putting it back toward paying down the loan can cost extra. If, on the other hand, the borrower didn’t get enough from the loan to cover expenses, they must then secure another loan or pay out of their available working capital.
With a line of credit, if a borrower has a limit of $10,000 but has only borrowed $5,000 from the account, the lender only charges interest on the $5,000 that’s been borrowed. If the borrower finds they need another $5,000 the following month, they still have room to access those funds. If, on the other hand, the business repays $1,000 back to the line, then $6,000 is available to borrow in the future.
Loan Highlights
- A line of credit can be borrowed from multiple times.
- Interest payments are due only on the amount that’s been borrowed.
- Payments made to the account by the borrower free up cash for the future.
- Lines can be secured using borrower assets or unsecured without collateral.
Benefits
- No penalties for early repayment.
- Flexible financing up to the approved credit limit.
- Lower interest rates than credit cards.
- Unsecured loans protect a company’s assets.
Challenges
- Because the balance can fluctuate, interest payments can be hard to track.
- Unsecured loans require high credit scores and often come with lower limits and higher interest rates.
- A secured line puts company assets at risk should the borrower default on the loan.
- Lines of credit aren’t the best option for real estate or high-end equipment purchases.