If you are running a business, you should have a line of credit to provide you with funds when you need them. However, if you are new to being a business owner, you may not know much about commercial lines of credit. The following guide provides information on how a line of credit works in easy-to-understand language.

The Basics

A business line of credit is a revolving credit account. This is different from a term loan in that when you pay back the line of credit, the funds become available again. It is similar to a credit card. If you pay your bill, you can continue to use the funds up to the credit limit.

In fact, thinking of a line of credit in similar terms to a credit card can be very useful. The main difference between the two is that a business line of credit will let you draw money into your account rather than paying directly with a card.

Secured vs. Unsecured

There are two major categories of credit lines: secures and unsecured. The former is secured against some asset as collateral. If you default on your payments to the line of credit, the lender can take the asset to recoup its losses. The collateral may be real estate, inventory, equipment, accounts receivable or a variety of other types of assets.

Unsecured credit lines do not have any collateral. However, the lender may use a lien or the courts to pursue recourse in the event that you default.

The key advantage of a secured line of credit is that you can get a higher limit with a lower interest rate because the risk is mitigated by the collateral. Conversely, an unsecured line is easier to get because you don’t need to put up collateral.

Applying

If you think that a business line of credit is right for you, apply with a lender. The process will involve a credit check, verification of your financial circumstances and an underwriting process. You will need to provide your personal and business credit, bank statements, tax returns, and other financial documents. If you want a secured line of credit, you will also need to provide information on the collateral.

Learn More

The above information is just the basics of lines of credit. Learn more about them and see if this is the right option for your company. It could be a great way to ensure you always have access to the working capital you need.