Lines of credit have many different options depending on the lender you choose. One of the biggest choices you need to make is between secured and unsecured credit lines. It’s not that one option is right and the other wrong. The decision you make can have an impact on your business though. You want to choose the option that fits your business needs and goals the best.
What Is the Difference Between Secured and Unsecured Credit Lines?
First, it’s important to understand what secured even means. Put simply, a secured credit line is backed by collateral. Any time you use collateral for funding, you’re offering security for the funds. This means that you provide a business asset to cover the line of credit you receive.
This has a few risks because it means that you can lose the asset if you get into debt and don’t pay back the funds. That said, this risk isn’t really any different from using a credit card for business purchases.
Unsecured credit lines don’t require any collateral for qualification. Approval is based entirely on your business financials and credit rating. This can be excellent for some business owners, but challenging for others, especially new entrepreneurs.
What Assets Are Used for Secured Credit Options?
To qualify for a secured line of credit, you need some type of valuable business asset. Many owners use real estate, such as warehouse property or the real estate location of the company. Other options include vehicles, equipment, inventory, unpaid invoices, or even a bank account.
For example, new businesses may be able to start building up a great credit score by taking out a line of credit based on a savings account. Each time they use the funds responsibly, their credit rating grows.
How Do Unsecured Lines of Credit Work?
Not all businesses have assets available for secured credit, but they can still benefit significantly from a line of credit. This financing acts as valuable working capital, which is a huge help for needs such as payroll, inventory, computer equipment, and good business opportunities.
You need to consider the terms of any line of credit. Unsecured LOCs from some lenders require signing a personal guarantee, which could put your personal assets at risk. Not all lenders go this route, though. In general, unsecured credit lines have higher interest rates and lower credit limits, but they make business goals much easier to reach.