Obtaining financing for your small business can be difficult, especially if you’re not sure exactly how much money you need to borrow. You could end up with too much or too little funding if you take out a term loan, and you would have to repay the entire amount plus interest. If you’re looking for a more flexible financing option, a line of credit could be the right solution for your business. Instead of borrowing a lump sum all at once, a business line of credit would allow you to withdraw money from a set amount as you need it. You would only make payments — and incur interest — once you used it. Like a credit card, a business line of credit is revolving, and the full amount becomes available again once you pay back your debt. Unlike a credit card, a business line of credit may be used for payroll or expenses that exceed a card’s credit limit.
A business line of credit can be secured or unsecured, depending on whether collateral is required when applying. The advantages of secured lines of credit are higher credit limits and lower interest rates, but your asset could be repossessed. In this article, we’ll discuss the details of a secured business line of credit and how it compares with other forms of financing for your small business.
When applying for a secured line of credit from a bank or online lender, you would need to offer collateral to back the credit line. Collateral requirements vary by lender but could include real estate, inventory, invoices or equipment. We’ll talk more about types of collateral below; in general, collateral reduces the risk to the lender but means more risk for you.
An unsecured line of credit, on the other hand, gives business owners access to funding without the requirement of collateral but typically means lower credit limits and higher interest rates. You can use a secured business line of credit to cover day-to-day business expenses and pay back the balance at a later time. A business line of credit is similar to a business credit card but doesn’t require a monthly payment. Lenders typically set their own repayment terms for lines of credit though most lenders would require you to pay down your balance within a year to show that the business has positive cash flow.
You can apply for a secured business line of credit from a traditional bank or an alternative lender, many of which operate online.
When applying, you would need to disclose details about your business and yourself, which could include:
You would also need to tell the lender about any other financing you’re paying off, such as a small business loan. The lender may want to know how you plan to use a business line of credit as well.
Your personal or business credit score would be an additional eligibility factor. A low credit score could make it harder for you to be approved for a business line of credit.
Collateral is a major requirement for getting a secured business line of credit. If you default on your debt, the lender would be able to seize the collateral you offered and liquidate the assets to pay off your balance.
A common type of collateral is current operating assets, including accounts receivable, inventory or unpaid invoices. You could also offer real estate such as your home, but be aware that you could lose that real estate if you are unable to repay the money you borrow.
A lender may put a lien on your assets, which is a legal claim that gives a lender the rights to your assets if you default or otherwise violate your borrowing agreement.
Securing a line of credit with collateral would help you get the money you need with favorable repayment terms and interest rates. But you risk losing valuable assets if you fail to keep your end of the deal and pay back what you borrow.
A secured line of credit is just one way to fund your business. Here’s how it stacks up against other popular financing options.
Secured line of credit | Unsecured line of credit | Business credit card | Term loan | |
---|---|---|---|---|
Interest rates | Variable, typically lower than an unsecured line of credit | Variable, typically higher than a secured line of credit | Variable, typically higher than lines of credit | Fixed with a set repayment schedule |
Credit requirements | Harder for startups to qualify for, but easier than a loan | May need a strong credit profile, but less paperwork than a secured line or loan. | Qualifying may be easiest because business, personal and spouse income considered | May need to provide: personal and business credit history, business plan and other documentation |
Spending amounts | Typically higher credit limits than an unsecured line of credit | Typically lower credit limits than a secured line of credit | Typically lower spending limits than a line of credit | One-time lump sum; may offer the highest amounts |
Collateral required | Yes | No | Can be secured or unsecured | Can be secured or unsecured |
Opening a business line of credit would give you access to readily available cash. You could withdraw money from a set amount on an as-needed basis and only pay interest on what you borrow. You could use a business line of credit to finance specific projects or to supplement cash flow.
Interest rates and repayment terms vary by lender and would be based on your financial standing and the collateral you offer. With any type of line of credit, be sure to withdraw amounts that you can fully pay back. If you borrow more than you can repay from a secured line of credit, you risk losing the collateral that you offered to the lender when you initially applied.
Before signing a contract or agreement, compare lenders to find the right offer for your small business. You should be comfortable with the terms they set for your credit line. Once you find a lender that you feel confident working with, you could be on your way to using a secured line of credit to fill financial gaps within your business.
Consider starting your search with LendingTree, MagnifyMoney’s parent company. On LendingTree’s platform, there are dozens of small business lenders eager to compete for your business. By filling out a short form, you can shop around and compare up to five offers from lenders based on your creditworthiness. This way, you can find the best financing option for your business.
By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.
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Source: https://www.magnifymoney.com/blog/small-business/secured-business-line-of-credit/