What Are Types of Lines of Credit?
Business cash flow is sometimes a frustrating journey. Everything can be running smoothly—and suddenly an important piece of equipment breaks. And then maybe your supplier bumps up prices, illness takes out half your staff, and you don’t receive multiple payments by the scheduled due dates.
These unexpected events happen to the best of business owners. When they do, sometimes all a business needs is a short-term cash solution to get over the hump.
A line of credit can be the perfect safety net for situations like this. It’s also an excellent funding option for business owners who need money for growth initiatives and other similar projects.
What Is the Point of a Line of Credit?
The biggest perk of a line of credit is its flexibility due to being “revolving” credit instead of “installment” credit. A typical business loan, for example, is installment credit—you borrow a fixed amount and pay that amount back in regularly scheduled installments.
Revolving credit, on the other hand, allows you to draw money up to a set limit, pay back that amount with interest, and continue reborrowing up to that set limit as many times as you need.
Because a line of credit is revolving, you can borrow as much or as little as you need at different points in time, and you’ll only pay interest on what you borrow (similar to a credit card, but there are some differences we’ll get to in a later section).
To further illustrate, imagine you get a $20,000 line of credit, but you find you only need to use $15,000 of the total amount. Because it’s revolving credit, you’ll only pay interest on the $15,000. If that $20,000 were a business loan, however, you would still be forced to pay interest on the entire $20,000 even though you ended up only needing $15,000.
Secured vs. Unsecured Line of Credit
Businesses have a few options to choose from when it comes to lines of credit, but all of the different types can be described as either “secured” or “unsecured.”
Secured Line of Credit - When a line of credit is secured, it means that it is guaranteed by some type of collateral. The designated collateral is what the borrower must forfeit if they fail to pay back the borrowed amount. Because the lender has this guarantee, they assume less risk when lending money through a secured line of credit, meaning they can usually offer higher credit limits, lower interest rates, and easier qualifying requirements.
Unsecured Line of Credit - An unsecured line of credit does not require the promise of collateral. This route is a bit riskier for lenders, as they don’t have an easy way to get their money back (like seizing a collateral asset) if the borrower fails to pay back the loan. More risk for the lender means higher interest rates, lower credit limits, and stricter qualifying requirements than a secured line of credit.
What Are the 3 Different Types of Credit Lines?
Borrowers can take advantage of a few different types of lines of credit, but the three most common are personal, business, and home equity. You can use all three types for a business, but there are some issues to be aware of if you go the personal or home equity line of credit route for this purpose. Let’s get into it.
Personal Lines of Credit (PLOC)
PLOCs are usually unsecured lines of credit that can be used by the borrower to fund any personal needs. In many ways, they are similar to a personal credit card, but there are some notable differences. PLOCs typically offer lower interest rates and higher credit limits than credit cards, making them a favorable option—however, they are harder to qualify for. You can also withdraw cash from a PLOC at any time and only pay the interest on what you borrowed, versus the hefty cash advance fees of a credit card.
For these reasons, it’s recommended to use PLOCs over credit cards for larger purchases or ongoing expenses that you intend to pay back over time. Some do use PLOCs for business purposes, but they run the risk of ruining their personal credit if their business doesn’t make enough to pay back the borrowed amount.
Business Line of Credit (BLOC)
A BLOC is tied to a business instead of a person, but they offer similar perks to a PLOC. The lender will have to examine the business’s market value, profitability, payment history, and other factors when considering a BLOC application. This allows them to determine whether the BLOC should be secured or unsecured and what the limit and interest rate should be. It’s recommended to use BLOCs for short-term business expenses, like covering a cash flow gap or repairing broken equipment.
Home Equity Line of Credit (HELOC)
HELOCs are secured lines of credit, with the collateral being any equity the borrower has in their home. The maximum amount a borrower can typically get for a HELOC is 75-80% of their home’s market value, minus any amount still outstanding on the mortgage. Homeowners frequently use HELOCs for home renovations, alternative debt repayment, or other large purchases. Just like a PLOC, you can use the funds from a HELOC for your business, but if you don’t pay back what you borrow, the lender can seek foreclosure and you could lose your home.
Need a Business Line of Credit?
Backd offers instant access to a revolving line of credit with unlimited terms and the best rates for businesses. We know there are plenty of lenders out there offering BLOCs, so what exactly sets Backd apart?
Our quick, efficient application process takes three minutes to complete
A soft credit pull that won’t affect your credit score
A short waiting period of less than 24 hours (and sometimes same day) for your decision
Credit limits ranging from $10,000 to $750,000
An unsecured line of credit (no collateral required)
Experience tailored to your business needs
As long as you’ve been in business for at least one year, have a minimum monthly revenue of $25,000, and own a business bank account, you can apply today! If you’re not quite ready and would like to learn a bit more about lines of credit, check out our line of credit resources and feel free to reach out with any questions.
