Small businesses often use three types of credit lines when they start the company: credit cards, home equity lines of credit (HELOCs), and business lines of credit. Here are some details on each to help you decide which is best for you.
Lines of credit are a good source of cash for short-term cash needs. Here are three popular choices for small businesses:
- Credit cards are usually unsecured, and you can't borrow as much as you can with a revolving line of credit. They are made for small purchases. They usually have high interest rates.
- Business revolving lines of credit may be unsecured or secured by inventory or accounts receivable. You can usually get a much bigger line of credit than you can get with a credit card. The commitment fee for lines of credit is usually 1% of the amount of the line. You are assessed the commitment fee whether you use the line or not. You are usually required to "rest" the line, which means paying it down to zero for a while.
- A HELOC (Home Equity Line Of Credit) is a line of credit collateralized by your house. This is a personal loan, not a business loan. One way they’re better than a business line is that there are no resting requirements. Resting means paying the loan to zero during part of the year. they often don't have a commitment fee like business lines. Here’s the risk: you can lose your house if you can’t pay the loan.
I wish you the right lines of credit for financing your business. I wish you well.
- Rob Stephens
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