As a business owner, you’ve likely needed to secure more funds to pursue different projects and initiatives. Opening a line of credit (LOC) can help you get the support you need to grow your business and make your ideas a reality, as it is a credit facility where you can take money until you reach the preset borrowing limit. Once you repay what you owe, you can borrow money again.
You can open a LOC with a financial institution, typically a bank, which determines the maximum loan amount you can borrow. As the borrower, you can then access the funds from the LOC if you do not borrow past the credit limit. Here’s what you need to know about LOCs and how they work:
All About Credit Lines
You can take advantage of different credit lines, such as persona, home equity, and business. LOCs are known to be flexible, which is why they’re so popular. Borrowers don’t have to stick to a rigid structure to borrow money as long as they repay the loan and don’t exceed the limit. However, credit lines have some downsides. They have high-interest rates and impose severe penalties for late payments, and due to their flexibility, borrowers are at an increased risk of overspending.
When you open a LOC, you can request a certain amount, but you don’t have to max it out. Instead, you can choose to use your LOC to meet your needs and pay interest only on the amount you withdraw instead of the entire credit line. You can also adjust your repayment amounts based on your current cash flow or budget. For instance, you can repay the outstanding balance in one go or make monthly payments.
Unsecured and Secured LOCs
The majority of LOCs are unsecured loans, which means that borrowers do not need to use their belongings as collateral to insure the amount they borrow. However, one exception is a home equity line of credit or HELOC, which uses the borrower’s home equity as collateral. Naturally, lenders prefer secured lines of credit because they offer a