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The fundamentals of business lines of credit
Business Capital

The fundamentals of business lines of credit

17 min read

Highlights

  • A business line of credit is a preset borrowing limit that can help your organization meet financial needs.  
  • Secured lines of credit require you to put down an asset as collateral, while unsecured lines don’t require collateral.

What is a business line of credit?

A business line of credit lets a company borrow up to a certain amount of money from a lender with the intention of paying it back. It is a type of revolving loan, which means (in the case of a credit card) the lender only charges interest on the amount borrowed, not the full credit limit, and once the credit is repaid, the business can borrow from the credit line again without a new approval process. This process probably sounds familiar to anyone with a personal credit card. 

Secured line of credit vs. unsecured business lines

What is a secured line of credit? 

This is when a lender requires an asset, such as a piece of property or cash, to serve as collateral to approve the loan. In some instances, if you were unable to pay back the loan within the agreed upon timeline, the lender could take the asset to make up for the difference. 

If a business doesn’t have solid business credit just yet, a secured loan can be a good option, because they are easier to qualify for than unsecured lines. They can also help you build credit without the risk of delinquency. 

Also, some secured lines of credit don’t require you to leave collateral with your lender long term—you can add funds for collateral as you need to spend. Essentially, you add funds to spend funds. This is lower risk for you, and it helps you build your credit

What is an unsecured line of credit? 

This is a line of credit that does not require any collateral. Usually there are higher interest rates in this kind of business credit line. A traditional business credit card is one type of unsecured line of credit. 

On the other hand, some lenders use charge cards instead of credit cards. Charge cards don’t charge interest on unsecured lines of credit at all, and the lenders will charge late fees for businesses that don’t pay back the money at the agreed upon time. These cards are paid off by the end of every period (often monthly) and do not carry a balance from period to period.

Pros and cons of secured and unsecured lines of credit

Every business has different business expenses, so without knowing your situation we can’t tell you with certainty which line of credit is best for you. So check out this list of pros and cons for each to help you decide what works for your business finances.  

Secured lines of credit 

Pros  Cons
More flexibility to borrow the amount you need—not always the maximum amount The interest rate could be variable, so be sure to check beforehand
Usually lower interest rates (in the case of credit cards) It can be easy to overspend, and there is a possibility of additional fees
You might be able to receive a longer loan repayment timeline Your collateral is on the line—and you could lose it

 

Unsecured lines of credit

Pros  Cons
No need for collateral  Usually higher interest rates and smaller loan amounts
Often more difficult to get approval from lenders

Revolving lines of credit vs non-revolving loans

A revolving line of credit can be used over and over; once you pay off your debt, the line of credit is available for you to use again. You will usually have to make minimum monthly payments, and an interest rate will be applied to the amount you borrowed. In these ways, it is similar to a credit card.

On the other hand, you cannot use a non-revolving loan after you pay it off. You would have to go through the approval process again and take out another loan or line of credit. It is a more traditional loan. These loans often have lower interest rates, and you can usually get approved for a higher amount of money than you would for a revolving line.

What is a variable credit line?

Sometimes a new tech startup without any credit history will have a lot of cash on hand, so some lenders will only offer them a variable credit line. This means that the amount of credit available to the business can change over time—or even from day to day—depending on the balance in their bank account. 

This keeps risk low for the lender, but the approach can be frustrating for some borrowers. If you want a dependable source of capital, you may prefer a fixed credit line instead.

How to get a line of credit for your business

When you need more working capital, a line of credit can make a difference. But how can you know when it’s time to get a line of credit? This guide will help you decide. 

Once you know it’s the right time, you’ll have to decide how much money you need, check your credentials (including your credit score and time in business), then choose the right lender.

Learn more about how to get a line of credit for your business.

How to build business credit

If you want to grow your business credit, you first want to make sure you have a business bank account. This can be as simple as a checking account at first, but it helps establish a banking relationship. 

Next you need to pay attention to your business credit reports. A strong credit score will make you more appealing to lenders, and you will be able to take out higher lines of credit at lower interest rates. 

You can also build your business credit with a secured line of credit, which can also earn you credit card rewards like cash back or airline miles—depending on the lender. 

Smarter expense management

Another great way to build credit is through smarter spending solutions. Expense management software can help you create budgets, track spending, reduce or eliminate fraud, and more. If you shop around, you’ll even find software solutions that are completely free to use. 

If you have a new small business, getting a new line of credit can be challenging. Divvy can help you work towards a line of credit with Credit Builder’s pay-as-you-go option. Schedule a demo today and learn more!

The information provided on this page does not, and is not intended to constitute legal or financial advice and is for general informational purposes only. The content is provided “as-is”; no representations are made that the content is error free.

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