If you’re considering going into business or you need funding for a large purchase, a line of credit may be the last thing you think about. Most people think of loans and credit cards first, but businesses have been using credit lines for decades.
How does a line of credit work?
A line of credit is essentially a flexible loan from your bank or financial institution similar to a credit card. With a line of credit, you can use the funds whenever you like and however you wish, and you can repay immediately or over a period of time. Like a loan, a line of credit charges interest as soon as the money is borrowed, and borrowers must be approved by their bank or financial institution.
Compared to credit card loans, lines of credit are a lower-risk revenue source. Most banks do not want to issue one-time personal loans for most customers, and for borrowers, it is not economical to take out a loan frequently, repay it, and then borrow again. Lines of credit allow banks to make a specific amount of money available whenever the borrower needs it.
Applying for a line of credit still means you have to be approved by your bank, so if you have a solid credit history, a line of credit may be ideal for you. Aspen Commercial Lending has two different types of credit lines. If you are just starting and your business generates less than 1 million in revenue, a small business line of credit will qualify you for between $25,000 and $150,000.
On the other hand, if you have a large business, you may need more income than that. If your business generates between 1 million and $10 million in revenue, you can potentially be approved for a loan amount between $100,000 and $500,000.
If you are looking for an alternative way to fund your business instead of applying for a traditional loan, a line of credit may be the ideal compromise. Lines of credit are similar to credit cards because you can repay and borrow again as needed, but they are also similar to traditional loans in that you must be approved by your bank or financial institution.