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Business credit lines

What is a Business Line of Credit?


In a nutshell, a business line of credit is an unsecured credit line granted to a business. 


Unsecured lines were extremely popular in the mid ’70s to the early ’80s. As the popularity of home equity lines of credit increased, unsecured credit lines all but disappeared from the lending landscape. 


We are now seeing a resurgence of these credit lines brought about by the ability of lenders to sell these lines into secondary securitization platforms. Basically, what this means is that lenders now transfer (sell) these business lines in packages of millions of dollars to the stock market - whereas before, banks would keep business lines in their own lending portfolios.


As with real estate lending, the secondary markets have brought with them a multitude of lenders offering a variety of programs.


The business lines are usually tied to the Prime Rate with a percentage added to this rate to arrive at a final rate of interest to the client. So, for example, if the Prime Rate is 6%, a lender may charge a client


Prime + 2 and 1/2 for an overall rate to the client of 8.5%. The payments associated with these lines of credit are generally lower than if someone were to obtain a cash advance on a credit card and are MUCH lower than if a client were to consider factoring (borrowing against invoices).


Rates charged to clients will generally vary between Prime + 1 and Prime + 3 depending upon the client's credit score, length of time in business, type of business and past performance of the enterprise.


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