Lines of credit can often be confusing. Should you apply for a personal or business line of credit? Here’s what to know about each option.
Key Differences Between Personal and Business Lines of Credit
A personal line of credit is one of several personal loans available from lenders obtained by borrowers for personal financial reasons. A business line of credit is a short-term loan available from lenders for various business expenses such as making payroll or covering bills during a cash flow shortage. A business line of credit can serve as emergency working capital small business owners can tap when they need money. Business lines of credit are typically alternative when emergencies arise than taking cash advances from business credit cards which require paying high-interest rates.
A line of credit works the same way, whether it’s a personal line of credit or a business line of credit. Borrowers are approved for a preset lump sum of money and can write checks or withdraw cash in any amount up to that credit limit. Then, borrowers make payments until the withdrawn money is paid back within the time frame the lender requires—called the draw period. Once the money has been repaid, it is available to borrow again. The difference between a personal loan (or small business loan) and a line of credit is that the borrower only pays fees and interest on the amount withdrawn. Like a credit card, this type of loan is called revolving credit.
Another key difference between a personal line of credit and a business line of credit is the criteria by which a lender decides to approve the loan. A solid personal credit score is vital for obtaining a personal line of credit as it shows the borrower has good spending habits and sound financial practices. Also, in many cases, a personal line of credit will require a borrower to put up collateral or make a personal guarantee before the loan is approved. Assets such as a home or CD savings account are offered as collateral if the borrower defaults on the loan.
You can find offers for personal and business lines of credit from many different financial institutions, such as large banks, community banks, credit unions, and alternative online lenders. Start with the bank where you have a checking account to inquire about a line of credit. Ask about annual fees and documentation requirements so you can compare lenders. Alternative online lenders also offer lines of credit, and the approval process may be much quicker.
Advantages of Personal Line of Credit
The primary advantage of getting a personal line of credit is its flexibility compared to a personal term loan with fixed monthly payments and finite total money available. Funds from a line of credit can be drawn and paid off over and over again. Also, there are typically fewer restrictions on what the personal line of credit can be used for, unlike car loans and home mortgages.
As previously mentioned, a personal line of credit lets you borrow only the money you need and incur interest only on the money you borrowed. Also, personal lines of credit often have flexible repayment options and lower interest rates than credit cards. Personal lines of credit also come with the opportunity to provide collateral to lower the interest rate. Finally, a personal line of credit may increase the variety of accounts you have on your credit report—a good thing, as credit mix is one factor of your score.
For the few restrictions on fund usage, a personal line of credit is a good option for borrowers needing access to cash for personal uses.
Disadvantages of Personal Line of Credit
Like credit cards and other kinds of revolving credit, personal lines of credit can hurt your personal credit score if you keep a high balance. In addition, if you fail to make a payment, your credit score can suffer considerably.
Another disadvantage of a personal line of credit is that it typically comes with a higher interest rate than a loan, the rate is variable, and the interest does not count as a deductible expense. Look out for annual or monthly maintenance fees, as the amounts vary significantly by lender. A loan may be a better idea if you want lower interest payments or need a longer term to pay back the loan for big purchases.
Advantages of Business Line of Credit
Small businesses often have to juggle finances to pay bills on time and not ruin their business credit scores. A business line of credit can act as a rainy day fund when needed. Like the personal line of credit, the main advantage of the business line of credit is the flexible payment options, immediate access to cash, and fewer restrictions on fund usage. Unlike a small business loan where funds must be used for the purposes contracted in the loan documents, a business line of credit can help your business grow and survive the many unforeseen expenses that occur in the rollercoaster ride of owning a company. When money is tight, securing a business line of credit is a quicker solution and doesn’t have the strict qualifications insisted upon by traditional business loans.
A business line of credit can help fund employee development programs, purchase a better facility or office space, cover payroll expenses, increase inventory, or buy new equipment. Likewise, funds from a business line of credit can be drawn and paid off repeatedly.
Plus, a business line of credit is a valuable option for business owners with seasonal cash flow issues, emergency repair issues, and other business expenses needing payment.
Disadvantages of Business Lines of Credit
The biggest challenge borrowers have with access to immediate cash is using the business line of credit for unnecessary purchases. Think about why you want a business line of credit and only apply for the amount you need to cover needed expenses.
Although they have lower interest rates than business credit cards, business lines of credit do have higher rates than traditional business loans, so think about how much money you need in the short term and how much your business can afford to pay back.
Can a Personal Line of Credit Be Used for Your Business?
While personal lines of credit have the flexibility to be used for several reasons, using personal funds for your business is never a good idea. First, if you’re unable to make payments on the personal loan, you’ll simultaneously be messing with your personal credit score and putting your business at risk.
Also, when it comes time for filing taxes, it’s vital to separate your personal and business finances for various reasons, including the ability to claim losses and deductions for your business. Also, you need to keep your personal and business bank accounts separate. The Internal Revenue Service (IRS) scrutinizes how you keep your finances to determine if your business is a legitimate entity.
Need a Line of Credit? Contact Financing Solutions Today!
Financing Solutions is an alternative lender offering an easy application process (it takes less than two minutes to fill out) and requires no collateral or documentation to get a written offer letter. Other alternative lenders have a much longer application process and can be relatively expensive.
The founders of Financing Solutions have started and grown several companies together, so we understand how important it is to keep costs low. That’s why we don’t charge you to set up the credit line, and there are no maintenance fees. We don’t ask for personal guarantees, and applicants can receive a no-obligation offer letter the same day. We make approval decisions based on our decade of experience working with small businesses. Find out today why we have five-star ratings from the Better Business Bureau and Google. Also:
- There are no costs to set it up or keep it in place
- There’s an easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup—within 48-72 hours
- Once you’re approved for the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
A line of credit is a good funding resource that’s available whenever your company needs it, without the heavy burden of term loan requirements. If you want to see if your small business would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.