A small business line of credit is typically offered as unsecured debt, which means you don't need to put up collateral assets that the lender can sell if you default on the debt.
For example, many banks will require a business to have been under current ownership for some fixed amount of time. Maintaining a line of credit in good standing may help build your business credit rating and position you for better loan terms if you seek future financing. Many small business experts suggest that first-time applicants should start a modest line of credit and pay off the debt quickly as a way of building a credit profile.
Depending on your specific business needs, a small business line of credit could be the simple solution you need to meet your goals for growth — at a pace that's right for you.
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Learn more or update your browser. Understanding Business Lines of Credit. Likewise, lines of credit were often quite popular during the housing boom to fund home improvement or refurbishment projects. People would frequently get a mortgage to buy the dwelling and simultaneously obtain a line of credit to help fund whatever renovations or repairs were needed.
Personal lines of credit have also appeared as part of bank-offered overdraft protection plans. Here again, though, is an example of the use of a line of credit as a source of emergency funds on a quick, as-needed basis. Like any loan product, lines of credit are potentially both useful and dangerous. If investors do tap a line of credit, that money has to be paid back and the terms for such paybacks are spelled out at the time when the line of credit is initially granted.
Accordingly, there is a credit evaluation process, and would-be borrowers with poor credit will have a much harder time being approved. In most cases the interest on a line of credit is not tax deductible.
Some banks will charge a maintenance fee either monthly or annually if you do not use the line of credit, and interest starts accumulating as soon as money is borrowed. Because lines of credit can be drawn on and repaid on an unscheduled basis, some borrowers may find the interest calculations for lines of credit more complicated and be surprised at what they end up paying in interest.
As suggested above, there are many similarities between lines of credit and other financing methods, but there are also important differences that borrowers need to understand. Like credit cards, lines of credit effectively have preset limits—you are approved to borrow a certain amount of money and no more. Also, like credit cards, policies for going over that limit vary with the lender, though banks tend to be less willing than credit cards to immediately approve overages instead, they often look to renegotiate the line of credit and increase the borrowing limit.
Again, as with plastic, the loan is essentially preapproved, and the money can be accessed whenever the borrower wants, for whatever use. Lastly, while credit cards and lines of credit may have annual fees, neither charge interest until there is an outstanding balance. Unlike credit cards, lines of credit can be secured with real property. Prior to the housing crash, home equity lines of credit HELOCs were very popular with both lending officers and borrowers.
Credit cards will always have minimum monthly payments, and companies will significantly increase the interest rate if those payments are not met. Lines of credit may or may not have similar immediate monthly repayment requirements.
Like a traditional loan, a line of credit requires acceptable credit and repayment of the funds and charges interest on any funds borrowed. Unlike a loan, which generally is for a fixed amount for a fixed time with a prearranged repayment schedule, a line of credit has both more flexibility and, generally, a variable rate of interest.
When interest rates rise, your line of credit will cost more, not the case with a loan at fixed interest. There are also typically fewer restrictions on the use of funds borrowed under a line of credit.
A mortgage must go toward the purchase of the listed property, and an auto loan must go toward the specified car, but a line of credit can be used at the discretion of the borrower. If you decide that a loan is best for you, finding the best place to borrow can be particularly stressful when you face a financial emergency and you need money in a hurry. For those with the additional obstacle of less-than-stellar credit, accessing cash quickly may seem even more daunting.
Fortunately, there are a variety of emergency loan options that may be available to you even when you have credit problems. Likewise, a pawnbroker or payday lender does not care what a borrower uses the funds for, so long as the loan is repaid and all its fees are remitted. The differences, however, are considerable. For anyone who can qualify for a line of credit, the cost of funds will be dramatically lower than for a payday or pawn loan.
By the same token, the credit evaluation process is much simpler and less demanding for a payday or pawn loan there may be no credit check at all , and you get your funds much, much more quickly.
It is also the case that payday lenders and pawnbrokers seldom offer the amounts of money often approved in lines of credit. And on their side, banks seldom bother with lines of credit as small as the average payday or pawn loan. Lines of credit are like any financial product—neither inherently good nor bad. On one hand, excessive borrowing against a line of credit can get somebody into financial trouble just as surely as spending with credit cards. On the other hand, lines of credit can be cost-effective solutions to month-to-month financial vagaries or executing a complicated transaction such as a wedding or home remodeling.
The other component of a variable interest rate is a margin, which is added to the index. The margin is constant throughout the life of the line of credit. Payments may change based on your balance and interest rate fluctuations, and may also change if you make additional principal payments. Some lenders, including Bank of America, offer an option that allows you to convert a portion of the outstanding variable-rate balance on your HELOC to a fixed rate.
Payments you make on a balance at a fixed interest rate are predictable and stable and can protect you from rising interest rates. There may be up-front fees, such as an application fee, an annual fee and a cancellation or early closure fee. Ready to apply? Apply online now. Want more options?
See how to get cash back when refinancing your home. Evaluating the available equity in your home. Smart ways to use home equity. Calculate your monthly home equity payment. Explore current rates and other financing options on our home equity rates page. In life, you often face major home improvement projects, unexpected costs, education expenses, or the need to consolidate debt. Your home's equity is the difference between the appraised value of your home and your current mortgage balance.
Much like a credit card, a HELOC is a revolving credit line that you pay down, and you only pay interest on the portion of the line you use. Plus, Bank of America offers rate discounts when you sign up for automatic payments, as well as discounts based on the funds you initially use when opening the HELOC.
The interest rate is often lower than other forms of credit, and the interest you pay may be tax deductible, but you should consult a tax advisor. On screen copy: Please consult your tax advisor regarding interest deductibility as tax rules may have changed.
Continue to use your home equity line of credit as needed for the duration of your borrowing period, usually 10 years. If a HELOC sounds right for you, get started today by giving us a call, visiting a financial center, or applying online at bankofamerica. No matter what large expenses you may face in the future, a home equity line of credit from Bank of America could help you achieve your life priorities. On screen copy: Credit and collateral are subject to approval.
Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice. Sequences shortened. Screen images simulated. Bank of America, N.
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