Essentially, a secured business line of credit is a line of credit backed by an asset. Businesses on different startup funding stages can leverage their assets to access affordable working capital by using secured business lines of credit. You can access a secured CL if you have the collateral to support it. This funding option gives your business higher credit limits and lowers interest rates. This blog is all about the solutions for a secured business line, such as types of business credit lines and the pros and cons of having these lines of credit. Let’s get started.
Types Of Business Credit Lines
Secured Business Line of Credit
This kind of LOC requires the business to pledge certain assets as collateral to secure the line of credit. Lenders often need short-term assets like accounts receivable and inventories because a line of credit is a short-term liability. Lenders do not frequently need capital assets such as real estate, construction funding solutions, or machinery to secure a LOC. The lender will take ownership of any collateral and sell it to cover the outstanding balance if the borrower cannot repay the line.
Unsecured Business Line of Credit
Although a general lien and personal guarantee will probably be needed, this sort of LOC does not demand specific assets as collateral. This form of credit line has no defined collateral, so the company will probably need a higher credit history and a positive business track record to qualify. Additionally, interest rates are likely to be slightly higher; and credit lines for unsecured companies tend to be smaller.
Determining if a line of credit is right for your business.
To assess this, we must look at the pros and cons of having a line of credit. We will talk about its benefits first.
Advantages
LOC Improves Cash Flow During Slow Seasons
A line of credit is frequently the best instrument for firms to balance their cash flow. Of course, some businesses will benefit from this more than others.
For instance, a retailer that earns most of its sales over the holidays can struggle to pay its employees at other times of the year due to a cash flow problem. A small company line of credit is the sensible choice for this kind of firm as you cannot pay your personnel using a credit card.
Improves Business Adaptability
You could occasionally have a little window of opportunity to seize possibilities. Let’s take the scenario where you are a manufacturer, and your supplier offers you a discount. It’s hard to afford that limited-time offer, but you’ll want to take advantage of it. With a business line of credit, you’ll have the opportunity to save money in the long run!
Pay What You Use
You pay interest only on the amount you use when you receive a credit line.
You might be able to settle the sum at any time without incurring a prepayment penalty, depending on the agreement you have with your financial institution. However, you’ll typically have to pay a minimum amount each month on the amount you’ve already used.
Enhances business credit
A business line of credit also has the benefit of assisting in the development of your company’s credit history.
For instance, in order to qualify for personal or convenience store business loans with lower interest rates, you must have a long personal credit history. The same is true with business credit, and a commercial line of credit can be helpful in this endeavor. Getting a business line of credit might be an excellent strategy to improve or maintain your credit score.
Now, let’s talk about the cons of the lines of credit.
Disadvantages
Extra Fees
Pay-as-you-go business lines of credit may seem great, but the fees can pile up very quickly. Depending on the other terms of the arrangement, these extra expenses will differ from lender to lender.
Finally, avoid being seduced by a cheap interest rate only to be hit with a slew of costs afterward. You must do your homework and contrast the annual fees and other expenditures of different online lenders. You may either find the ideal line of credit for your company by doing this, or you can find out whether another financing option will be more reasonable.
Difficult Eligibility Criteria
You must submit financial statements showing your company’s annual income and cash flow to apply for a business line of credit.
You may need to validate the following documents:
- Bank account information
- Business and personal tax returns
- Business planning documents
- Checking account information
- A yearly review to maintain your credit line.
To qualify for a line of credit, you will often need two years of business history. There are other types of financing you may be able to obtain, which will come with a shorter application process and fewer requirements. You can choose between a small business loan, a cash advance, or a business credit card.
Potential for Misuse
The value of a company line of credit depends on how you use it. Therefore, it should only be used as an insurance policy against cash flow problems. It’s a recipe for catastrophe to use excessively, yet for many people, the temptation is genuine.
This might not be the ideal time for you to take on a line of credit if your company has already accumulated a sizable amount of debt or if you are unsure that you will be able to repay your bill.
Low Borrowing Thresholds
Lines of credit often have lower borrowing amounts than other types of lending. Therefore, applying for a term loan would be preferable if you need money to cover an expensive business outlay, new equipment, or a planned growth project.
If you need any kind of assistance, you can contact Upwise Capital. They have a team of professionals to assist you with greater business funding solutions who can help you avail of such solutions at the best terms.
Visit their website now and book a free appointment with financial experts.
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