An unsecured line of credit allows borrowing without collateral, but requires a high credit rating and may have lower limits and higher interest rates than secured lines. It is useful for short-term projects and requires consideration of the company’s needs and costs.
A line of credit is an agreement between a bank or financial institution and another entity, such as an individual or business, that allows the entity to borrow money up to an agreed amount, as needed. Secure lines of credit require the company to post collateral, or assets, to help secure any borrowings taken out on the line of credit. Companies with an unsecured line of credit do not need to build up any assets because the financial institution considers the line of credit to be a good risk. The main advantage of getting an unsecured line of credit is that the business owner will not have to risk any assets to obtain the line of credit and will still have all the advantages associated with having a line of credit. There are two main drawbacks to getting an unsecured line of credit – that the financial institution may not want to extend a credit line sufficient to meet the company’s needs, and that the financial institution may charge a higher interest rate than the institution would pay a secure line of credit.
An unsecured business line of credit allows the homeowner to borrow money, or not, as the homeowner sees fit. The concept of a line of credit is similar to that of a credit card. A business owner only needs to make payments and pay interest on the money he has taken out of the line of credit, regardless of the maximum amount available. Entrepreneurs typically use their line of credit to finance short-term projects rather than finance the purchase of goods and equipment.
Banks and financial institutions will not automatically provide business owners with an unsecured business line of credit. The company applying for the unsecured line of credit needs to have a high credit rating, which can take years to build. Even if a company has a qualifying credit rating, a financial institution is likely to try to hedge its bets. This means that the institution cannot extend as high a limit to an unsecured credit line as it would if the credit line were secured. Additionally, the financial institution may charge higher interest rates to further protect your investment.
There is no one answer as to whether a business should take out a secured versus unsecured line of business credit. The company must explore both possibilities, taking into account the type of product or service that the company offers and what the market and competition are like. In addition, the company must take into account any additional costs that a financial institution may require to obtain an unsecured line of credit.
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