How Do Lines of Credit Work?
Like a credit card, a business line of credit allows you to have business financing that you can utilize whenever you need it. When you receive a line of credit, you are provided with a limit that you are not allowed to exceed. In addition, with a line of credit, you can receive cash to cover business expenses. This makes a business line of credit different from a credit card because the borrower gets cash to cover costs that couldn’t otherwise be purchased with a credit card.
Revolving line of credit:
With this line of credit option, you will have a limit that you cannot exceed. Each time you make a purchase for your business, this limit will be lowered. Then, once you pay off your balance, your limit can go back up.
Nonrevolving line of credit:
Unlike a revolving line of credit, once the limit has been met, it cannot be used again, even if the balance has been paid off.
Secured line of credit:
With this option, you put up collateral, such as a car, home, or piece of equipment to secure the line of credit. If you are unable to repay your debt, the lender could take ownership of this collateral.
Unsecured line of credit:
If you apply for an unsecured line of credit, you are not required to put up collateral. Typically, this option is available to business owners with excellent credit scores or other strong aspects of their financial history.
Pros and Cons of a Business Line of Credit:
- PRO: Helps with cash flow – Many business owners utilize a business line of credit to successfully balance their cash flow.
- CON: Can be challenging to qualify for – If you are a new business or have a less than stellar credit score, it could be difficult to qualify for this type of financing.
- PRO: Build your business’s credit – Having a line of credit can enable you to build your business credit history, which will benefit you in future financing pursuits.
- CON: Potential of overspending – Some business owners find it too tempting to have a line of credit, especially if they are prone to overspending.