If you’re thinking whether to apply for a secured or an unsecured business line of credit, this article should be able to help you come up with an enlightened decision. To compare these two business financing options, let us first define what a business line of credit is. Then, let’s discus the basic differences between a secured business line of credit and an unsecured business line of credit.
Business Line of Credit and Business Loans
A business line of credit can be utilized for different purposes such as in purchasing equipment or machineries, launching projects, keeping a steady cash flow, buying stocks, and more. What makes it different from a business loan?
A business loan is given as a lump sum payment while a business line of credit can be taken out in installments. Within the given term or time period, a business owner can take out the cash amount he needs as long as he doesn’t exceed his credit limit or credit line.
Differences Between Secured and Unsecured Business Line of Credit
A business line of credit can either be secured or unsecured. An unsecured line of credit does not require any type of collateral so that it poses more risk to the lender. For this reason, unsecured lines of credit are often limited to a smaller credit.
On the other hand, a secured line of credit requires the submission of collateral as security for his debts. Typically, the business owner’s home or property is submitted as collateral so that the credit limit for secured business line of credit is higher than an unsecured line of credit. Other forms of collateral that can be used are the business’s accounts receivables or business assets.
Making the Choice
Regardless of what type of business line of credit you prefer, it is important to choose your lender wisely. Be sure that you are well aware of your payment terms. Take note of the interest rate and the other fees included in your agreement. Read and understand your contract before signing up any document.
Your credit standing can also make a big difference with the rates you’ll get. If you have a business credit, see to it that all your accounts are in good shape and that there are no past due bills in your credit report. If you haven’t yet established a business credit history, your personal credit history would be used instead.
Of course, lenders offer the lowest interest rates and the best deals to clients with impressive credit rating. If you have a problem with your credit history, it may be better to work on improving your credit first before applying for a business line of credit. You may need to wait for at least 6 months or so to see some improvement in your credit score. Nevertheless, if you can’t afford to wait that long, you may have to do more research to find a lender that offers reasonable terms despite having a bad credit.
