Borrowers have many different options for lines of credit. Whether you need a business line of credit, a nonprofit line of credit, or another type, here’s what to know.
The Different Types of Lines of Credit Explained
Line of Credit Defined
A line of credit is a type of short-term loan that lets you borrow money when you need it, up to a predetermined borrowing limit. The loan is a revolving line of credit, so the entire loan amount is available to borrow again throughout the draw period when the money is repaid. Borrowers pay interest and fees only during the period the money is withdrawn, per the line of credit agreement. When the money is paid back, typically, the loan is free from charges.
7 Types of Lines of Credit Available to Borrowers
Business Line of Credit
A business line of credit can be a smart backup plan for small businesses when they experience unexpected cash flow shortages or need to pay company expenses. A business line of credit gives a business owner access to a lump sum of working capital during the draw period—the length of the loan agreement. Business lines of credit are revolving lines of credit. If the borrower stays within the credit limit and pays back the withdrawn portion under the agreement terms, the money remains available to use again. Many business lines of credit are accessed during a company’s slow sales season or when expensive equipment needs to be replaced.
You can find business lines of credit from many financial institutions, such as banks, credit unions, and alternative online lenders. Make sure you compare interest rates and terms before choosing a lender. For small businesses, obtaining a business line of credit from a traditional bank may be difficult as their qualifications typically require an excellent credit score, at least two years of credit history, and sizeable annual revenue.
Nonprofit Line of Credit
A nonprofit line of credit is like a business line of credit, but it’s specifically available to nonprofit organizations. Also, like the business line of credit, the nonprofit line of credit is revolving credit with a preset interest rate and a credit limit. While nonprofits also count on fundraising and grants to carry out their missions, they also experience times of economic uncertainty. A nonprofit line of credit can come in handy when waiting for donations and government reimbursement checks to come in without incurring the higher interest rates associated with credit cards.
Most lenders offer nonprofit lines of credit. However, unlike a for-profit business with a sales history, lenders may see nonprofits as more of a risk and, therefore, may require collateral or personal guarantees from nonprofit board members. Lines of credit backed by collateral are called secured lines of credit.
Personal Line of Credit
A personal line of credit is a personal loan with revolving credit available for approved borrowers for personal finance purposes. Borrowers can write checks or withdraw cash in any amount up to the borrowing limit and then make payments in whatever amounts the lender requires. Paying interest only occurs during the times the funds are withdrawn.
Personal lines of credit usually have significantly lower interest rates than credit cards. They are suitable for borrowers looking for short-term funding solutions such as small home improvement projects or to get through irregular work cycles. Most personal lines of credit are secured by collateral such as a house or car. Unsecured lines of credit are available but carry much higher interest rates.
Secured Line of Credit
When a lender approves you for a business line of credit, nonprofit line of credit, or another type, you are given a lump sum of money you can borrow against when needed. A secured line of credit requires the borrower to offer up an asset like real estate, equipment, or savings as collateral in case you default on the loan.
You’ll find lenders typically offer lower interest rates for secured lines of credit, as the risk is not as significant as with an unsecured line of credit. Also, if your credit score is low or you have a questionable credit history, the lender may not approve the credit line unless it is secured. The drawback is that if you can’t pay the loan back, you will lose the asset you put up for collateral.
Unsecured Line of Credit
Unlike with a secured credit line, you will not be asked to provide collateral with an unsecured line of credit.
Still, many lenders will require lots of information from you before providing you with an unsecured line of credit. You will be asked for both your personal and business tax returns, business registration documents, bank account information, and more. Additionally, most banks require you to have a credit score of at least 700 and submit to an annual financial review to maintain the line.
Revolving Line of Credit
Credit cards and lines of credit are revolving lines of credit. A credit line is like having an emergency cash fund available when needed. Loans can take weeks or months before being approved. A revolving line of credit is replenished once the borrower pays back the withdrawn funds without having to reapply for the loan.
Home Equity Lines of Credit
A Home Equity Line of Credit (HELOC) is a personal line of credit using the equity in your home as collateral. The equity in your home is calculated based on the market value of your home minus the mortgage loan still owed to the bank.
A HELOC differs from a home loan in that the draw period will be much shorter than a home loan, and a HELOC typically has a varying interest rate based on the prime rate. Home loans have lower interest rates; however, if you are not willing to commit to a long-term loan paid over 15-30 years, a HELOC might serve as a better short-term solution.
Looking to Open a Line of Credit? Call Financing Solutions!
Financing Solutions is an alternative lender offering an easy application process for lines of credit (it takes less than two minutes to fill out) and requires no collateral or documentation in order to receive a written offer letter. Other alternative lenders have a much longer application process and can be fairly expensive.
The founders of Financing Solutions have started and grown several companies together. Therefore, 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.
- There are no costs to set up the line or keep it in place
- The easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you have 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.