A line of credit allows you to draw on capital as you need it – up to a specific amount, and for a specific length of time. This versatile approach allows you to fill funding gaps in your business as they appear, without borrowing more money than you need. These simple, effective loans are ideal for certain types of business with strong credit ratings.
-You can withdraw capital as it is needed
-Interest only applies to funds withdrawn
-Can cover many incremental or long-term business needs
-Interest rates can be high for businesses with poor credit
-Not designed for large lump sum payments
-Collateral is sometimes required
Lines of credit are often compared to credit cards (although the terms differ significantly). Companies typically use them to meet frequent, ongoing cost needs that ordinary income cannot cover. For example, a seasonal business may use a line of credit to make up for the lower revenue received in the off season. Another common example is an ongoing project where a line of credit can be used to pay for contractors as supplies as they are needed. While it may not be suitable for covering large expenses, a line of credit can prove very useful for day-to-day business operations.
Because of its inherent versatility, lenders prefer to see businesses with a credit score of at least 560 before providing a line of credit (and even higher credit scores can yield better terms). A track record of faithfully making loan payments is also helpful. Lenders may also require collateral. As with most business loans, you will need to provide documentation of your business and its revenue history.
Interest rates for a business line of credit typically range from 8 to 24 percent. However, it's important to note that most traditional lines of credit will only apply that rate to money withdrawn from the credit account. Ask your lender for more information about individual terms and how the account is managed.
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