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Lines of credit, or LOCs, are a powerful commercial funding option. They are versatile financing which can be used to pay everyday business expenses such as employee wages or utility bills, or they can be used for larger business needs, like material or equipment. They are also unique in the commercial loan environment because they have built-in flexibility. The borrower can be approved for a certain amount, but they do not have to use it all.

There are a variety of different types of LOCs based on how the loans are secured and the amount being requested. Because of this, the borrower needs to have a concrete understanding of what they need the funding for and what options will be best for paying off the loan.

The Benefits of LOCs

With their built-in flexibility, they prevent the borrower from over-borrowing at the outset and incurring unnecessary fees. Similar to credit a card, the borrower is expected to pay back only what they borrower, rather than being forced to use and pay back the entirety of the loan. This means that if the borrower doesn’t spend as much as they initially anticipated, they don’t need to worry about paying off the additional interest and borrowed amounts.

Three different types to meet a myriad of needs.

There are 3 distinct types of lines of credit: Secured, Unsecured, and Working Capital.  Despite many similarities, the critical differences lie in what they can be used for and how they are secured. Secured LOCs are lower interest, higher limit loans which are secured by placing owned property in a lien in case the borrower is unable to pay back the financing. Unsecured LOCs are borrowed against the borrower’s credit score, similar to a credit card. Finally, working capital LOCs are smaller, short-term loans which are used to pay off everyday business expenses rather than for long-term purchases, such as equipment or material.

Each type suits a different company best and will fulfill different needs based on the borrower’s size and expectations. A secured line is better for a smaller or medium-sized business, as it is easier to get access to because lenders feel more comfortable providing the loan when it is backed up in case of default or other unforeseen issues. Unsecured lines are better suited to larger companies, as they are more likely to have the means to repay them and will probably have the better credit history required for approval.

How to tell which is right for your business. 

Finding the LOC that is right for you will require an understanding of your exact needs. Are you looking to simply pay off some bills during a slowdown in business, or are you looking to purchase a large order of supplies? Is your company financially secure enough that you feel you will be able to pay back a large loan in a rapid enough time period or would having the loan backed up to provide security? These and other questions will be essential to answer as you and your broker work to find the solution that is right for you.

The simplest question to answer is how long you will need the LOC for. If you only need a boost to help get through a slowdown in business, then a working capital LOC will work better than the others. If you are expecting to make a series of payments, or are unsure how much of the LOC you will need to access, then a secured LOC will work best. Understanding what you will be using the LOC for will help you better understand your options, and make it easier to find a lender who will work with you to provide the loan.

LOCs aren’t the best option for every borrower, of course.  Our brokers will be able to work with you to determine if they are right for you, and how to best apply for one.