You can think of a personal line of credit as a hybrid between a loan and a credit card. Instead of having to apply for a loan every time you want to make a purchase, you can turn to your line of credit to get the funds you need at any time. Compared to a credit card, this option generally has lower interest rates and offers a larger amount of funds, but also has stricter requirements for qualifying.

How does this type of financing work? Why do some business owners use personal lines of credit? This guide can answer many of your questions.

The Basic Process of Using Credit Lines

Any line of credit works in similar ways. The first step is to apply. Factors such as your credit score determine the total amount of financing the lender decides to offer you. Once you’re approved, the funds are available to you, but you don’t actually have to pay any interest unless you utilize them.

Once you decide to make a purchase, you pay using your line of credit. The necessary funds are withdrawn, similar to what happens with a credit card. You have a certain amount of time to repay the money, and interest is added if you choose to carry the balance forward. The funds are revolving, so they become available again once you repay the amount owed.

The Benefits of Personal Lines of Credit

There are three main advantages to using a line of credit. First, it’s fast. You can spend the money whenever you need it, no questions asked.

Second, it’s flexible. You don’t need to request permission before buying something. The money is available for purchasing technology, operating a business, paying taxes or covering other needs.

Finally, lines of credit are always available. They act as a safety net. You don’t have to use the money, but you can when you need it.

Ways a Personal Line of Credit Can Help in Business

Sometimes, a personal line of credit is a great fit for running a business. One can help if your company isn’t able to qualify for business lines of credit yet. This is common for startups. The rates you get are often better than for credit cards, and the funds can help you purchase equipment, hire employees, take care of payroll and do many other things.

Risks of Personal Lines of Credit

Before you sign on the dotted line, read the terms. Be careful if personal lines of credit require collateral. Using personal assets could put your home at risk. If you have good personal credit, choose an unsecured credit line instead.