What Is a Line of Credit?
A line of credit is a flexible loan from a bank or financial institution. The credit line is like a credit card where you have limited access or a credit limit you can borrow to and then pay back, similar to a credit card that can be paid back monthly or in multiple payments. When accessing funds on a credit line it’s just like a loan where you are charged a fee or interest until you pay it back. The stronger your relationship with your bank the better it is when getting the amount you need with strong deposits. Typically, the interest rate is generally variable, which makes it difficult to predict what the money you borrow will end up costing you. If possible, it may be better to seek a credit line outside of a bank through an investor or Blue Vine or Kabbage.
Lines of credit tend to be lower-risk revenue sources relative to credit card loans, but they do complicate a bank’s earning asset management somewhat, as the outstanding balances can’t really be controlled once the line of credit has been approved. Banks are not terribly interested in underwriting one-time personal loans, particularly unsecured loans, for most customers. Banks stray from these types of loans now because of the risk and they don’t see a benefit in these types of loans. It’s not smart for a person to take out a loan every month or two, repay it, and then borrow again. Lines of credit provide an answer both of these issues by making a specified amount of money available if and when the borrower needs it.
In conclusion, lines of credit are like any money product—neither good nor bad. It’s all in how businesses use them. On one hand, excessive borrowing will not result in a line of credit, and by borrowing so much can get a business into financial trouble just as surely as spending with credit cards. On the other hand, lines of credit can be cost-effective solutions in solving immediate problems like payroll or getting new equipment. What is always good to know is pay careful attention to terms and what you can accomplish and put you in a position to be successful.