Most small business lines of credit come from a conventional bank. Business lines of credit allow the small business owner to take advantage of the credit facility offered by the bank but at a more expensive interest rate. These business lines of credit can be used for any number of uses. To better understand business lines of credit it is beneficial to look at how they work.
Most unsecured business lines of credit come in two different types. These two types have different uses and are used in slightly different ways. These uses are also used interchangeably by most lenders. Here are the two different types of business lines of credit and what each one is best used for.
Short-Term Line of Credit – These business lines of credit offer flexibility in repayment terms. They allow the small business owners to make higher payments while having a lower line of credit than would be possible with another type of loan. They also come with a shorter repayment schedule which makes them ideal for urgent cash needs. Many banks provide short-term business credit cards to their account holders at an affordable rate.
Long-Term Line of Credit – These lines of credit provide a longer repayment period. For the most part, they have secured loans. This means that the borrower must have collateral or an equivalent value of the loan. Most long-term lines require repayment over a five to seven-year period. This form of financing is often best suited to business owners that have a solid track record of making payments on time and are rarely in a hurry to spend money that they do not have.
Unsecured Credit Lines – These lines come in two forms. The first, unsecured credit line of up to ten thousand dollars allows the business owner to apply for a credit line in any amount up to the lender’s recommended limit. The second, secured credit lines, of up to fifteen thousand dollars, allow the business owner to apply for a credit line over a secured credit line of up to one hundred thousand dollars.
Both of these secured credit lines have the advantage of lower interest rates than those offered through the unsecured credit lines. However, the interest rate applied to the unsecured credit line is based upon the credit score of the applicant. Because of this factor, many small business owners prefer the secured credit line over the unsecured credit line for their higher credit limits.
When applying for business lines of credit one of the most important factors considered by lenders is the business owner’s credit scores. A high business credit score can make the difference between getting your line of credit and being denied. Lenders will not deny business lines of credit to those businesses that have good credit scores. If you have poor credit scores however you can still get your business lines of credit and you just may be required to pay a higher interest rate. This does not mean however that you should settle for a business line of credit with a high-interest rate; you have options available to you.