Choosing the Right Line of Credit

A line of credit is a type of loan that allows a company or individual to borrow up to a set figure for a certain period of time. The borrower only pays interest on the amount utilized, and payments replenish the available amount. The funds are often accessed via card or check. There are a variety of credit line types on the market to fit many different needs.

Personal and Business Credit Lines

Credit lines are available for both personal and business use, and entrepreneurs can use personal credit to grow or start a company. Business lines of credit affect the company’s credit rating, and personal lines affect the individual’s credit rating even if the funds are used for business purposes.

For a business line, the borrower often has to provide profit and loss statements, balance sheets, and proof that the organization has been in existence for a period of time specified by the lender.

Secured and Unsecured Credit Lines

A secured line of credit is backed by assets. For personal credit, this asset may be a home or a certificate of deposit. Businesses can secure credit with outstanding invoices, inventory, or other assets. Due to the fact that the borrower is assuming the risk by putting up collateral, secured credit lines are often easier to qualify for and have lower interest rates.

Home equity lines of credit, through which homeowners borrow a certain percentage of the equity in their home, are the most common type of secured credit line. Although the funds can be used for almost anything, home improvements are tax-deductible according to the 2017 tax revisions. 

With unsecured credit lines, the lender assumes the risk of the loan. This means that instead of offering collateral, the borrower must have a strong credit history and be able to prove adequate cash flow to cover the repayment agreement. Although they are more difficult to qualify for and generally have higher interest rates, unsecured lines are more common than their secured counterparts.

Whether a borrower is looking for a secured or unsecured line of credit for business or personal use, it is important to understand all terms and conditions. The above information is helpful in deciding the type of credit line that best suits a business’s or individual’s needs, but all borrowers should speak with the lender and carefully read all documents before agreeing to any credit line or other loan.