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revolving line of credit

Revolving Line of Credit for a Better Credit Score?

Two entrepreneurs, let’s call them Mark and Luis, went to their local Business Development Center back when each of them was soon to launch a new business. In one of the workshops they attended there, they heard:

“A revolving line of credit is a flexible method of borrowing money for your business. Instead of borrowing a fixed amount of money all at once – like a loan – a revolving line of credit gives your business advance approval to borrow however much you need, up to a certain pre-approved limit.”

It became obvious to both of them that a business credit line could be a vital tool in keeping a business running smoothly through the inevitable ups and downs. And when expert after expert at the Center advised, “Get one as soon as you can,” they listened.

Lining up for a business line of credit

The thought of having a pre-approved amount of cash handy if and when it was needed, made sense to Luis and Mark. They saw how an approved credit line could help them make payroll in a slow month. Or enable them to act quickly to replace broken equipment. Or take swift advantage of new opportunities.

They liked the fact that as they paid back a loan like this, the funds would once again become available to them. No need to re-apply. They liked, too, that they would have to pay interest only on the funds they used.

The decision to apply for a business credit line seemed to both guys pretty much a no-brainer.

Secured or unsecured?

Because of his near-perfect personal credit score, rock-solid business plan, and history with his lender, Luis was able to get an unsecured line of credit for his business. “No collateral needed,” the lender said. But because a lender takes on greater risk with an unsecured loan, the interest rate on Luis’ line of credit was higher than if he’d put up collateral. He was OK with that since he preferred not to mix his personal assets with the finances of his fledgling business.

Mark, on the other hand, had a FICO score that put him out of the running for an unsecured line of credit. His business credit line would need to be secured, he learned, by a deposit of cash nearly equal to the amount of the loan. He decided to move ahead anyway since the interest rate on a secured line of credit is typically lower than that of an unsecured line. But there was also another reason.

The ability to build a better credit score

Delinquent bill payments in the past had had an adverse effect on Mark’s credit score.

“That was then,” he said. “This is now.”

Mark knew that by making timely payments on this loan, he’d be building a high credit score for his business. He would show that he could manage debt responsibly. And that, in turn, would make getting other business loans – larger term loans, perhaps – more likely in the future.

Though their circumstances were different, in the end, both entrepreneurs made a line of credit work for them and their businesses. To see how a business line of credit can work for you, talk to a Quote 2 Fund representative.