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FAQ - Business Lines of Credit
What is a business line of credit?
A business line of credit is a type of small business financing that provides more flexibility than most other small business loans. It works similarly to a credit card. Instead of borrowing a set amount up front, you have a credit line (the maximum amount you can borrow), and you can draw funds as needed and repay them over time. You pay interest only on the money that you borrow, and most lenders allow you to repay your full balance early to save on interest costs.
Is a business line of credit more expensive than a business loan?
Usually, no. One of the great features of a business line of credit is that you only pay interest on the funds you use, not the full maximum amount available. For example, if you’re approved for a $50,000 business line of credit and you use $25,000, you’ll just pay interest on that $25,000. Only paying interest on what you use could save you a bundle in interest over time.
What can I use a business line of credit for?
You can use a business line of credit for almost any valid business need, including buying equipment, paying or hiring staff, increasing inventory, adding a new location, paying invoices, etc. You can also use the line more than once! How? A line of credit is 'revolving', meaning you can keep reusing and repaying your line of credit as often as you’d like, as long as you make payments on time and don’t exceed your credit limit.
Does opening a line of credit hurt your credit score?
Opening a new business line of credit may lower your credit score in the short term if the lender makes a hard inquiry on your credit. While this might cause your credit score to drop a few points temporarily, repaying the line of credit on time can actually help you build your credit.
Are all business lines of credit secured or unsecured?
Business lines of credit may be either secured" or unsecured. A secured business line of credit means you are putting up collateral, such as inventory or equipment. If you fail to pay back the credit line, a lender could seize your assets. An unsecured business credit line doesn’t require collateral, though some lenders might still require a personal guarantee or a lien against business assets.
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