If you’re looking for access to working capital, you may be interested in a loan. But what if there was a better option?

Many traditional and alternative lenders offer lines of credit to businesses who want to grow. Depending on your goals and business model, a line of credit may be the better option. Of course, to find out if this financing works for you, you need to understand what a line of credit is and what it can offer.

Is a Line of Credit a Loan?

A line of credit does have a principal. Any funds that you use must be paid back with interest. However, most business loans provide a lump sum at the beginning. A line of credit, on the other hand, allows you to draw on the principal throughout the term. You can take as much as you want, up to the maximum available principal.

Are There Different Types?

There are two types: secured and unsecured. A secured line of credit requires collateral, which you surrender if you default. An unsecured line of credit, on the other hand, doesn’t require any collateral. These are harder to get because they’re a greater risk to the lender.

What Are the Benefits of a Line of Credit?

Flexibility is the most obvious benefit when it comes to lines of credit, since you can access funds whenever you need them. You can also control the amount of your monthly payments to some extent since the interest due is based on the amount of principal you’ve used.

What Are the Downsides?

One of the downsides is that lines of credit usually have a variable interest rate. If the market rates go up, you end up paying more interest. However, it also means that if the market rates go down, your interest also goes down.

How Can You Use the Funds?

Once you access funds from your line of credit, you can use them however you want. That includes buying inventory, renovating and covering payroll. You can even use the line to pay off other debts.

Who Can Apply?

Businesses of any industry can apply for a line of credit. The one thing to keep in mind is that most lenders are looking for good credit history and a decent profit margin. This may make it difficult for some businesses to qualify. However, you can also use a personal line of credit for business expenses, so that may be a better option for small businesses or startups.