by Debi Enders
A line of credit can be a great option for a small business. It can help finance operations or provide a financial safety net in emergencies.
Many businesses prefer lines of credit to traditional loans, which provide a lump sum that must be repaid immediately. A line of credit functions like a credit card, enabling you to borrow and pay interest on only the money you need.
There are a couple of important distinctions, however, between a credit card and a line of credit. For one thing, a line of credit’s interest rate may be lower than a credit card’s.
Another important difference: no one cares if you don’t use your credit card. With a line of credit, however, it really can be a case of “use it or lose it” – especially if a bank would like to make the funds available to another borrower. A line of credit has a 12 month term and is reviewed annually, so be sure to use it as intended.
But, be aware: if you close an unused line, you will need to reapply. It’s a good business practice to borrow against a line of credit at least once a year – even if you pay it back before any interest is due.
If, on the other hand, you use your line frequently, it’s wise to make payments on the principal each month. If you withdraw the entire amount and make interest-only payments, your bank may ask you to convert the line to a term loan. The interest rate will likely be lower, but the flexibility the line afforded will be gone.
The bottom line: use your line of credit wisely, and it will be available to you in good times and in bad.
Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.
Submitted 8 years 338 days ago