When your small business needs money, should you look for a secured line of credit or an unsecured business line of credit? Both have their advantages and disadvantages. Here’s what you need to know.
What’s the Difference Between a Secured and Unsecured Business Line of Credit?
As a business owner, you face many challenges on the road to entrepreneurial success. One of the biggest challenges is keeping your company afloat by optimizing cash flow to pay everyday operating expenses. All business finance options have their pros and cons, including business lines of credit.
The difference between a secured or unsecured business line of credit is that a secured line of credit requires collateral, which is a type of asset required by lenders to back up a secure business loan if the borrower cannot repay the small business loan. Collateral protects the lender from default, and the borrower must agree to give up the assets to the lender if they don’t make the monthly payments. Some examples of collateral are:
- Commercial Real Estate: Whether personal or commercial, lenders like to see real estate as collateral for its high value.
- Accounts Receivable: Some lenders will accept accounts receivables as collateral, as AR shows a cash flow history.
- Invoice Financing: Unpaid invoices can be used as collateral to prove the company has money coming in, and the future funds from your customers would go to the lender.
- Inventory Financing: If your business defaults on the loan, the items listed as inventory can be sold by the lender to recover their loss.
- Equipment: Office and manufacturing equipment and other technologies owned by the company can be used as collateral
- Blanket Liens: A blanket lien gives the lender the right to seize all assets (property, equipment, savings accounts) that serve as collateral owned by a debtor, such as cars, real estate, stocks, bonds, and more
A warning: small business bank loans typically require collateral. While an unsecured business line of credit doesn’t require collateral, that often means you’ll be charged a higher interest rate on a loan.
What are the Main Advantages of a Secured Business Line of Credit?
The primary advantage of a secured line of credit for small business owners is the savings you get from a better interest rate and lower fees. Because the loan is guaranteed with some form of collateral, it is less risky for the lender, and so they can offer you the lower interest rate.
Other advantages to a secured business credit line include:
- Most business funding requires collateral; therefore, there are plenty of financing companies offering secured business lines of credit, such as banks, credit unions, and online lenders.
- And, because you are guaranteeing the loan with collateral, your small business is more likely to get approved for the loan.
- Getting collateral often means lenders are more likely to approve your company for larger loan amounts than with an unsecured business line of credit.
- In some cases, small business loans also require a personal guarantee from the business owners, which puts your personal credit at risk. With a secured business line of credit, you may be able to negotiate to back the loan with collateral only.
However, secured business lines of credit also have some disadvantages. For one, the application and renewal processes typically take much longer than applying for an unsecured business line of credit. Also, as the borrower, you are responsible for getting your collateral appraised, which takes both time and money. As most small business owners need an influx of money sooner rather than later, the time delay could be catastrophic. Finally, securing the loan with the business’s assets is a risky move, considering anything could happen to prevent your company from making on-time payments.
What are the Advantages of an Unsecured Business Line of Credit?
Unlike the secured business line of credit, an unsecured business line of credit does not require any collateral or personal guarantee, which means your business gains access to the funds much quicker. And, with no liens put against your assets, you’re not at risk of losing valuable real estate or equipment.
A small business line of credit is a short-term loan that lets you borrow money when you need it, up to a predetermined borrowing limit. Similar to a credit card, the loan is a revolving line of credit, so the entire loan amount is available to borrow again throughout the draw period once the borrowed funds are repaid. According to the credit agreement, borrowers pay interest and fees only when the money is withdrawn. When the money is paid back, typically, the loan is free from any charges.
Because the unsecured business line of credit is a short-term loan, you may only have access to the funds for a year before it needs to be renewed. However, if you use it as an emergency fund when cash flow is unstable and make payments on time, getting the unsecured business line of credit renewed shouldn’t be a problem. Plus, having a short-term loan paid off contributes positively to your credit history and credit score—something you’ll need if you ever want to obtain a larger business loan for expanding your company.
Is Your Business in Need of a Line of Credit?
Every business has unexpected financial emergencies. Planning for future cash flow shortages helps to ensure your company will survive to see another day. At Financing Solutions, we make getting a line of credit fast and easy. We ask for very little paperwork, and it’s possible to get your money the same day.
Financing Solutions is an alternative lender offering an easy application process (it takes less than two minutes to fill out) and requires no collateral or documentation to get a written offer letter. Many other alternative lenders have a much longer application process and can be relatively expensive.
The founders of Financing Solutions have started and grown several companies together, so we understand how important it is to keep costs low. That’s why we don’t charge you to set up the credit line, and there are no maintenance fees. We don’t ask for personal guarantees, and applicants can receive a no-obligation offer letter the same day. We make approval decisions based on our decade of experience working with small businesses. Find out today why we have five-star ratings from the Better Business Bureau and Google. Also:
- There are no costs to set it up or keep it in place
- The easy 2-minute application online application
- If approved, you’ll receive a same-day, no-obligation offer letter
- The fastest setup, 48-72 hours
- Once you have the line of credit, requests for funds are wired to your bank in minutes
- You can use your line of credit whenever needed
- Inexpensive when used (low fees)
- There are no restrictions in place or collateral required
- No personal guarantee is required, either
- Financing Solutions is a leading provider of lines of credit
- We are a reputable company with an A+ & 5-star rating
- You can pay off the line whenever you are ready
- The credit line is easy to renew and renews yearly
- You have a secured account portal access 24 x 7
A line of credit is a reliable funding resource that’s available whenever your company needs it, without the heavy burden of term loan requirements. If you want to see if your small business would be approved and for how much, please fill out the no-obligation, 2-minute line of credit application here.