Now and then, even successful small businesses need access to cash- but there’s a problem. The process of securing business financing from lenders can be extremely time-consuming. However, there’s a tool known as a business line of credit that allows the business to fill out an application, borrow money, pay it back, and borrow more when they need it.
There are two types: secured and unsecured. We’re going to explain the differences in this article.
Secured Business Lines of Credit
Typically, when you take out a business line of credit, the lender will place a lien on the assets that you use to secure the funding. Requirements for collateral vary from one lender to the next, but here are a few types that are commonly accepted:
Real estate
Cash
Vehicles
Equipment
Financial securities
Inventory
Invoices
Since you’re willing to risk your assets, you may have an easier time qualifying for secured business lines of credit than unsecured ones. For the lender, collateral makes you a more attractive borrower.
In addition to increasing your chances of qualifying, collateral can lower your rates, provide higher credit limits, and improve your terms.
Unsecured Business Lines of Credit
Many small business owners would rather not risk their assets to get cash for their business. Perhaps they are just getting started and don’t have any assets yet. This is where an unsecured business line of credit comes in.
This type of credit line operates as a business credit card account. You can borrow up to the limit and as long as you pay as agreed, you can borrow against it in the future. While it’s true that you’re not having to put up collateral, it actually may cost you more in the long run.
Typically, these lines of credit are more expensive. This is because less risk for the borrower means more risk for the lender. To offset this increased risk, lenders may:
Charge higher rates/fees
Offer lower credit limits
Require shorter terms
Require a guarantee to be signed by the borrower
Of course, this does not in any way indicate that unsecured lines of credit are bad, you just need to take the time to assess the advantages and disadvantages of each.
Conclusion
When it comes to growth capital, there are several ways to obtain funding. One of these ways is through business lines of credit. As you see, there are two types. If you’re still not sure which one is right for you, please contact Rexford Commercial Capital to learn more.
By Rexford Commercial Capital