Business Line of Credit
Flexible financing solution.
Business Line of Credit
What is a business line of credit and how does it work?
A business line of credit is a flexible financing option available to businesses, allowing them to borrow up to a certain limit and pay interest only on the amount used. It functions similarly to a credit card in that it offers a revolving credit limit that can be tapped into for various business expenses as needed.
Once the borrowed amount is repaid, the credit becomes available again. This type of credit is especially useful for managing cash flow, covering unexpected costs, and financing short-term business needs without the need to apply for multiple loans.
The flexibility and convenience of a business line of credit make it a popular choice for businesses looking to maintain a steady flow of capital, ensuring they have funds available when necessary to seize growth opportunities or handle unforeseen expenses.
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Types of Lines of Credit
There are two types of business lines of credit:
- Secured. A secured business line of credit requires you to pledge collateral—which is something of value, like accounts receivable or inventory—that a lender can seize if you fail to repay what you borrow.
- Unsecured. An unsecured business line of credit doesn’t require you to pledge collateral. However, a lender may require a personal guarantee, which means you accept personal responsibility for repaying the loan if the business is unable to make payments. This could affect your personal credit, too.
Business Lines of Credit vs. Business Loans
Sometimes a business loan is preferable to a line of credit. Loans generally offer lower or fixed interest rates and higher funding limits, making them suitable for capital investments and expansion projects. A business line of credit offers flexibility for short-term working capital needs, but typically has higher or variable interest rates and lower borrowing limits.
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