How Lines of Credit Work
Lines of credit are flexible loans that allow borrowers to take out only what they need at the time, not the full amount of available of credit. Payments are then made on the amount borrowed and the remaining credit remains open and available for future use, usually until a specific date decided by your lender. There are different types available, depending on your needs.
Business Lines of Credit
A popular tool for resolving cash flow problems, business lines of credit are typically secured with assets owned by your business. A lender may require financial statements, tax returns and a yearly review to keep the line open. The documentation required will depend on the type of business — sole proprietorship, S-corporation, partnership, LLC or C-corporation — and the current financial state of the business. Relying too heavily on this type of financing can create problems in the future, so it is best used for emergencies only.
Personal Lines of Credit
A personal line can be used for just about anything. If your lender offers a low fixed interest rate, consolidating higher interest and variable rate debts, like credit cards, can be advantageous. The paperwork and information required is similar to what you’d provide for a credit card application. Since these are unsecured loans, meaning there’s no asset or collateral to ‘back up’ the loan, a strong personal credit history is required.
Home Equity Lines of Credit
If you’re interested in accessing the equity in your home, but you don’t need or want to draw all of it at once, a home equity line of credit may be right for you. Other options, like cash-out refinances or home renovation loans also draw on your existing equity, but typically provide a one-time lump sum for a stated purpose. Home equity lines are like having a credit card attached to your home, so while they can be an attractive option for accessing non-liquid assets, be careful overextending this type of credit.
Whether you’re looking to solve a temporary shortage of cash in your business or wanting access the equity in your home, lines of credit can be a great flexible option. Even if you don’t own a house or a business, with a strong credit history, a personal line of credit may be available to you. You’ll make payments only on the amount you draw and keep the rest of the line available for any unforeseen circumstances.