Lenders extend "lines of credit" to large and small creditworthy businesses. These revolving (reusable) borrowing accommodations allow companies to finance normal operating costs on an annual basis. To the extent that a lender usually sets a maximum borrowing limit at the beginning of each year, a business receives a fixed line of credit for that period. Interest rates for business credit lines are generally tied to the "prime" rate, which is the rate provided to major U.S. banks' most financially sound customers. Hence, a rate of one or two points over prime would be considered a good line of credit rate.
Business Line of Credit
Commercial banks provide credit lines on an unsecured or secured basis and usually require full repayment each year. Lenders will reevaluate corporate customers each year for further credit extensions based on a thorough analysis of their most recent financial statements, management capability, market share and industry outlook. The requirement to repay credit lines annually assures the lender that its funds are being used for short-term purposes only and reduces the bank's risk of loan default due to business reversals or future deteriorating business conditions.
Home Equity Line of Credit (HELOC)
In most cases, lenders grant personal lines of credit to homeowners and secure the lines of credit by the available equity in their homes. These lines of credit come in the form of home equity (second mortgage) loans or home equity (second mortgage) lines of credit. Home equity loan amortization cannot be borrowed again, but these credit extensions usually bear a lower interest rate than HELOCs. By contrast, home equity lines permit repeated access to the unused portion of the credit line and usually carry a variable rate, although some banks offer a fixed rate option.
Business Credit Line Interest Rate Factors
Besides good credit, a strong balance sheet and a healthy economy, other issues play into determining what is a "good" interest rate for a particular business. Large multinationals may control so much future business for a particular bank that they can demand and receive short-term borrowing rates below prime. Smaller companies that operate in high growth markets represent attractive future business for banks and are often courted by the offer of below market interest rates to acquire their business.
Personal Credit Line Interest Factors
Approval of a home equity loan or line of credit is based on an appraisal of the "equity" in the home and the homeowner's financial capacity to repay the debt. Home equity is the difference between what is owed on the home (the first mortgage balance) and its current market value. The lowest interest rates will be offered to people who have the highest FICO credit scores (720 to 850) and represent overall the lowest risk to the lender. The Fair Isaac Corporation (FICO) compiles its credit scores from information provided by the three major credit companies.