If you’re starting a business, or your business just doesn’t qualify, a personal line of credit can be the answer when small sums of money are needed. In these cases, a business owner will obtain a home equity line of credit (HELOC) which is secured against their home. If your credit is very good you may qualify for an ‘unsecured’ line of credit, although ‘unsecured’ is misleading. In the event of default due to a failure of the business, you are still personally on the hook for the money you have borrowed and the lender can, and will, sue you to recover their money.

“A line of credit is easy to get”

Wrong. The days when a bank would lend to small businesses on the strength of a good business plan are gone. While private investors may still take on that kind of risk, financial institutions do not. It would be much more accurate to say that ‘Lines of credit are relatively easy to get – if you have collateral’. No bank or large financial institution will give you a line of credit unless you have some easily liquidatable asset such as real estate. In addition, your credit score and business cash flow will be taken in to account. Finally, most lenders will require that you have been in business for at least 2 years.

Credit Lines have the advantage of flexibility and are sometimes the only option for small business owners, however they also have limitations. Getting a line of credit increased once in place can be very difficult. Even if your business is successful, if you’ve maxed out your line of credit and need more money to expand, you’ll need to jump through a number of hoops with your bank to prove that you’re worth the risk and, in many cases, the less time you’ve been in business, the harder it will be to extend your credit line. So if you’ve found fast success, you’ll likely need to explore other options.

The best alternative for a credit line for small businesses is the SBA 7(a) loan program, which can provide working capital up to $350,000 for qualifying borrowers.

• Minimum Time in Operation: 6 months

• Minimum Revenue: $50,000 annually

Benefits

• Lukewarm credit OK

• A good credit building tool

• Only pay interest on the funds you use

• Quick and convenient access to cash

• Can be used for any purpose

Drawbacks

• Updated financials may be required

• Lender can close the line of credit at any time

• Collateral may be required

• Poor credit equals a higher interest rate