Many business owners only have a general knowledge of financing options. This is normal, as they’re primarily experts in running their companies. That said, learning about the types of financing available can help entrepreneurs make smart decisions with their money and put capital to good use for business growth. This article covers one type of financing: business lines of credit.
What Is the Difference Between a Credit Card and a Line of Credit?
On paper, both credit cards and lines of credit look similar. Both provide a pool of funds that businesses can use on demand, and both options only charge interest on the funds used. The main differences relate to the terms, such as interest rates, fees, and funding amounts.
Credit cards generally cost more to use, with higher interest rates and more fees to consider. A business line of credit also has higher interest than a traditional loan but is more comfortable than a credit card. In addition, credit lines usually provide a much larger credit cap for users, which makes a big difference for companies.
Having access to more funds can help your business in at least two ways. First, it helps you get access to sufficient capital for important purchases, such as inventory. Second, a larger approved amount can keep your debt-to-loan ratio lower but still allow you to buy what you need. A lower ratio is good for your business’s credit rating.
Why Choose Secured or Unsecured Lines of Credit?
A secured line of credit needs collateral as security for the funds. When applying, businesses must provide some valuable asset as a guarantee, such as equipment, real estate, or inventory.
Unsecured credit lines don’t have collateral requirements. In this case, approval depends on the applicant’s credit rating. With a good credit score, business owners don’t need personal or business guarantees to get a large line of credit.
Secured credit generally provides a larger amount of funding, with better interest rates. For some companies, this is the only option to get approved. If a business has been operating for less than two years, it usually has to choose secured credit. Unsecured business credit has less risk because companies don’t need to use collateral.
What Does Revolving Credit Mean?
Revolving lines of credit continually refresh themselves as a business pays them off. This can provide access to dependable funds for years. The funds are essentially working capital for any need.