A line of credit works like a credit card. You have access to a set amount of funds, which you can draw on whenever you need. As you repay your line, your available balance replenishes, and you can use the money again and again. One of the most significant benefits is that you only pay for (and pay interest on) what you use. Here’s what you need to know about the different types of lines of credit to help you find the best option for your business.
Traditional Line of Credit
Traditional lines of credit from a bank are generally the most sought-after options. Bank rates are highly competitive, and these financial institutions often offer some of the most favorable terms. The problem, however, is they’re also the most challenging to obtain.
Alternative Lending Line of Credit
For those businesses that can’t get a line of credit through a bank, alternative lenders may provide a better option. These lenders require fewer documents and have more flexible requirements. As such, they’re easier to obtain.
Real Estate Line of Credit
If you’re looking to purchase real estate or you’re a developer, a real estate line of credit may make the most sense. Unlike a mortgage, you don’t need to provide financial statements, appraisals, or collateral. The lender bases your approval on your credit score
Secured Vs. Unsecured
When checking out lines of credit, you’ll find that there are two types: secured and unsecured. Secure lines are those that require some form of collateral, such as your inventory or accounts receivable. An unsecured line doesn’t require collateral. As such, rates may be a bit higher and credit limits may be lower.
Personal Vs. Business
Another consideration to keep in mind is the difference between personal and business lines of credit. A personal line generally uses personal property (such as your house) as collateral. One of the most common types is a home equity line of credit (HELOC), which is a type of second mortgage. A business credit line, on the other hand, may or may not use business assets to secure it. While you could use a HELOC to fund your business, keep in mind that your lender could take your house if you default, so weigh your options carefully.
When it comes to choosing a line of credit for your business, consider all of your options. Doing so will help to ensure that you find the best solution to meet your needs and help you achieve your goals.