So what’s the difference between a traditional term loan and unsecured business line of credit?
With a classic bank loan, you receive the total amount of money borrowed in a lump sum, and then, you have a specified time (term) to repay the loan plus the interest that it carries. The payments are typically based on monthly installments.
If you borrow more than you actually need, you are still responsible for paying the total amount back (with interest). Comparatively, with a business line of credit, you are prequalified for credit up to $200,000. However, you are not required to use that entire amount. Instead, you can extend yourself the funding to cover your fix and flip goals on an as-needed basis.
So, for instance, let’s assume that you need a fix and flip loan for $150,000 to purchase and renovate a property for selling purposes. If you approach a large bank for a term loan, go through their taxing process to get qualified, actually get qualified, and then receive the whole $150K in a lump sum, then you are going to be responsible for paying it all back plus the interest you accrue on the loan.
However, if you get approved for an unsecured business credit line for up to $150,000, then you can decide how to spend the money as the project progresses, eliminating the possibility of assuming too much debt to feasibly repay. Of course, using less then the amount you qualified for means that you have less principal and interest to repay.
This is a more intelligent approach for many borrowers because it greatly reduces the temptation and likelihood of using more money than you actually need to in order to facilitate the fix and flip project.