A line of credit is a revolving loan typically used to finance short-term or seasonal
expenses. It works on the same principle as a credit card. You use a
line of credit to borrow cash, and you pay interest on the outstanding monthly balance
only.
Each time the borrower pays back principal, money is freed up again for future loans.
Credit lines can be open-ended (like a standard credit card account), or they can
be due at the end of a specified term.
Personal vs. Commercial Credit Lines
A line of credit can be a personal loan or a commercial loan. Many small businesses,
especially start-ups, rely on personal credit lines to finance their companies.
A home equity credit line is a good example of a secured personal credit line. Unsecured
credit lines are also available, but their interest rates are usually higher.
Commercial lines of credit are preferable to personal credit lines because they
use company assets, rather than personal assets, as collateral. Also, you
typically have greater borrowing power with commercial lines of credit, although
these are generally harder to obtain.
Both types of loans have set borrowing limits. The amount, however, can vary
greatly based on a company's collateral and cash flow needs.
Interest rates on commercial credit lines equal or exceed the prime rate, and are
based in part on how risky your venture appears to be. Interest rates are
thus usually negotiable, and you should shop around before accepting a line of credit
from a particular lender.
Access to Credit Lines
Credit lines are easily accessed by calling your bank and requesting a transfer
of funds into your business checking account. Some banks let you do the transfer
yourself over the Internet. Banks also offer "sweep" accounts, which automatically
draw from your line of credit as needed, to help you manage your cash and keep interest
payments down.