As business owners, you continuously look for ways to expand your businesses. Therefore, it will be helpful to explore flexible financing options that will give access to your finances conveniently.
Two Business Lines of Credit: Secured and Unsecured
There are two types of business lines of credit you can use. One is the secured type, which relies on a collateral such as equipment or real estate, and there’s the unsecured business lines of credit, which does not.
The Secured Business Lines of Credit
The secured business line of credit guarantees repayment in the form of assets; it provides security to the lender through collaterals, in case the business owner fails to obtain payment. Some of the expected collaterals are among these:
- Real estate
- Company inventory
Although this lending option puts some risk on the borrower, it ensures repayment for the lender. This “security” allows the lender to provide better financing plans (lower interests and higher credit limit) and more flexible repayment terms. Since most unsecured lines of credit expect a good credit score, this alternative is mostly used by startup business owners or those with bad credit.
The Unsecured Business Lines of Credit
The unsecured business lines of credit are a type of financing that offers the same convenience as a regular business credit card. Instead of having a lump sum of money, this provides a maximum amount you can spend, known as the credit limit.
Even though it holds quite the risk for the lenders, this type seems more attractive for business owners. Since lenders will not be assured of anything, some will prefer setting higher interest rates and lower credit limits. But this is not the case for all. There are still lenders that can offer a good deal, despite the risk.
However, they can be selective when it comes to providing financial aid. Borrowers with fair to good credit are mostly their priority.
There are two types of unsecured business lines of credit: the traditional and the alternative.
1. Traditional unsecured business line of credit
This unsecured line of credit requires a significant number of documents before qualification. Lenders may look into your bank accounts, financial statements, personal and business tax returns, and business registration. To maintain this line of credit, you will need to complete an annual financial review.
2. Nontraditional unsecured business line of credit
This type allows for a credit card on the business’ name. Alternative lenders usually have fewer restrictions, and depending on your credit score, they can approve and process your loan faster.
Pros and Cons
As with every financing option, an unsecured business line of credit has its benefits and drawbacks.
- The key benefit of having an unsecured loan is that you will not need collateral to obtain your funds.
- You have no restriction when it comes to using your funds. You can also access it as often as you want, given that you settle your balances accordingly.
- There’s no interest placed on unused funds.
- With good financial practice, your credit line will increase.
- A business line of credit can be appealing to banks, especially when you are applying for a loan.
- An unsecured line of credit can charge additional fees and higher interest rates.
- Unsecured loans may have shorter repayment terms.
- Unsecured business lines of credit are more difficult to obtain, especially for those with bad credit. The lenders often require a higher credit score, and they may have a desirable minimum time in business.
Applying For An Unsecured Business Line of Credit
If you are a new business owner, with not many assets at your disposal, you could look into the unsecured business lines of credit. These are some things you can consider when applying:
- Have a set amount in mind
- Take note of the documents needed
- Practice good financial management
- Raise your credit score
In the end, what matters most is how you can manage your finances. Make sure you are thinking ahead while making the right financing decisions.
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Liz Roberts has been in the business financing industry for 22+ years. She got her start in banking, went on to consumer and commercial collections and then onward to becoming a senior credit analyst for several small leasing companies. She has also been a freelance writer for 15 years and has written about business and consumer financing on several blogs. She also maintains a low carb living blog.