Line of Credit

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Line of Credit
Line of Credit Financing

Line of credit financing is one of the most common and versatile means of finance available to business.

A line of credit is an agreement between a business and a lender in which the lender makes a specific amount of credit available to the business. The business can choose when and where to use the line of credit. The business also decides how much of the credit to use.

As with a loan the lender charges the business interest on the line of credit financing. The difference between a loan and a line of credit is that a line of credit is an open ended means of finance. A loan is a onetime payment of money that the borrower has to pay back. Once the loan is paid back it is closed for good. A line of credit remains available as long as the arrangement between lender and borrower is in place.

Advantages to Line of Credit Financing

The principal advantage to line of credit financing is that it is a kind of finance that a business can tap into at any time. The business can use it to cover costs when cash flow is short or use to finance expansion.

Another advantage is that the business won’t have to sell equity or control in the business to get most lines of credit. Unlike investors most lenders that provide lines of finance simply want to get their money back. They don’t place restrictions on the operation of the business.

Line of credit financing can also be used to limit the amount of debt a business has. This can enable the business to keep a good credit rating and enhance its ability to borrow. Line of credit financing can also keep interest rates and the cost of financing low.

Kinds of Line of Credit Financing

The most common line of credit financing is bank financing which is available to almost all businesses in the form of credit cards or checking lines of credit. Banks will make lines of credit available to businesses that maintain a certain level of funds in their accounts. Bank financing is easily accessible through checking accounts and credit cards. It can be hard to get for startup businesses and businesses with bad credit ratings.

Hard money financing is a loan of cash directly to a business by investors. Hard money lenders charge a high interest rate and expect to get repaid fairly quickly. The advantage to hard money financing is that it is available to any business that can demonstrate cash flow.

Private equity financing is a line of credit that can be secured by property the business owns or a stake in the business itself. Private equity lenders are more likely to lend those with bad credit. The drawback to them is that they can end up owning the business or its property.

Real estate equity financing is a line of credit secured by equity in real estate the business owns. To get this financing the business will have to own real estate in which it owns credit.

How to Find Line of Credit Financing

Most businesses should be able to locate line of credit financing by going online. Banks, private equity lenders and hard money lenders all make money available to businesses on line. Many of these lenders will make lines of credit available quickly.