Should You Use Personal or Business Lines of Credit?

Lines of credit help cover expenses when you do not have available capital. Unlike a loan, this finance option provides a set amount of money you can access, like a credit card. If you are self-employed, freelance or own your own business, you may experience irregular income. A line of credit helps deal with cash flow problems when funds are low.

There are several things to consider when you decide which type of credit line is right for you. You can choose secured or unsecured options using either personal or business qualifications. Research your options before selecting the one that is right for you.

Personal Lines of Credit

These finance options are open-ended loans that allow you to withdraw money as needed. The lender sets the amount, loan terms and repayment schedule. Interest on the outstanding balance starts accruing once you use the funds. Typically, lenders require monthly payments.

Personal credit lines are available in secured or unsecured terms. You generally receive more favorable terms and lower interest rates if you provide collateral to back the loan. This type of financing usually requires monthly or annual fees. You can typically use the money when you want for any use, providing you do not exceed the limit.

Advantages of Personal Credit Lines

The primary benefit of this funding type is the flexibility of use. Some other positive aspects include the following:

  • You have access to money when you need it.
  • You only incur interest on the amount you use.
  • The APR is lower than a credit card.
  • There are few restrictions regarding the use of available funds.
  • You can draw up to 100% of the limit.

Business Lines of Credit

A business credit line is a revolving loan that offers a fixed amount of money. These loans help meet short-term needs. A secured business line of credit requires backing with short-term assets, such as inventory or accounts receivable. An unsecured line requires a personal guarantee and a general lien. To qualify for unsecured financing, you must have a positive business history and a strong credit score. This option typically has a smaller limit and a higher interest rate.

Uses for Business Credit Lines

Companies may access this money to pay for short-term capital needs, such as:

  • Paying expenses during seasonal fluctuations in revenue.
  • Buying supplies or inventory.
  • Making repairs to essential equipment
  • Covering payroll
  • Paying for an advertising campaign

Financing immediate needs with credit lines is an excellent option for your business needs, depending on the funding terms and your unique circumstances. Consider the pros and cons when selecting the best option for you.