What is a business line of credit? What is the difference between a secured and unsecured business line of credit? How do you get a business line of credit and is this the right path for your business to take? Today we will answer all of your questions concerning a business line credit. Just keep reading below.
What is a Business Line of Credit?
What is a business line of credit? A business line of credit is similar to a business card or a business loan; however, what distinguishes a business line of credit is important. A business line of credit is able to provide flexibility that a regular business loan is not able to provide. It also grants businesses access to funds that can be used to address business expense. The way that a business line of credit works is that it allows you to borrow funds up to a certain limit, and requires to you pay interest only on the specific portion of the money that you have chosen to borrow. This grants you flexibility, are you are easily able to draw and repay funds in the way that you prefer, keeping in mind that you do not exceed your credit limit and that you make your payments on time. In essence, you are able to reuse and repay your business line of credit as often as you would like to. In fact, most lenders grant you the ability to repay your full balance way in advance, in order to help you save on interest costs.
A business line of credit does not require disbursement the way that a regular business loan does, and instead, works similarly to the way that a business credit card does. It is subject to annual review and similar to a business credit card, the amount that you pay after you draw funds is accessible to be borrowed again, as you pay your balance.
What is a Secured Business Line of Credit?
What is a secured business line of credit? A secured business line of credit is a type of revolving line of credit. A revolving line of credit refers to a merchant or a bank that offers an amount of credit that is “always available” to a business for a certain amount of time. In the case of a business line of credit, a secured business line of credit allows you to use a specific asset as collateral, in order to secure the loan. This asset could include a home, a stock, a bond, or a car, for example. The way that this works, is that the borrower can take a hold of the borrower’s specific asset if the business does not repay the business line of credit debt according to the signed terms.
On the other hand, an unsecured business line of credit does not require the borrower to place any collateral under the business’s name. We will talk about more about the unsecured business line of credit and the way that it works in our upcoming article sections.
A business can use the funds from their secured business line of credit for multiple business-related purposes, including and of course not limited to daily business-related financial needs or specific business-related equipment.
Think about it this way: a secured business line of credit works similar to the way that a business credit card works, minus the monthly business credit card bill that you are required to pay in the case of a business credit card.
When you use your secured business line of credit, you are only required to pay interest only on the funds that you draw.
What are the Benefits of a Secured Business Line of Credit?
Because your creditor has the right to seize your collateral, your lender will typically offer your business better terms than in the case with an unsecured business line of credit. These better terms could include being able to borrow a larger sum amount of money, higher spending limits, and lower interest rates.
A secured business line of credit is an especially great choice for a new business. The reason for this is that new business will typically not have a financial history or a proven track record since they were recently developed. Due to such circumstances, new businesses are usually not able to qualify for an unsecured business line of credit.
One of the greatest advantages that come with obtaining a business credit line is that you will only be required to pay interest on the specific amount of the loan you actually used, allowing you to pay back the funds at a later time. This also means that your business can get away with taking our new loans every time that the business is in need of financial funds. This potentially helps businesses to avoid any additional credit inquiries and will lead to overall better cash flow for a business. A secured business line of credit allows you to manage your expenses with ease, without needing to instantly pay back your business loan. By using a secured business line of credit, you will grant your business the chance to focus on company growth and steer clear of the possibility of over-borrowing financial funds.
What is an Unsecured Business Line of Credit?
What is an unsecured business line of credit? An unsecured business line of credit is a type of revolving line of credit, just like the way that a secured business line of credit is. In the case of the unsecured business line of credit, however, no collateral is required in order to secure the loan.
Unsecured business lines of credits are typically more wanted amongst businesses than secured business lines of credits are, because no collateral is necessary to secure it. This, however, is something that makes an unsecured business line more difficult to obtain. New businesses, for example, may not receive approval to borrow the funds that they need, since the creditor is posed with a greater chance of risk. This poses stricter eligibility requirements, for obtaining an unsecured business line of credit. These requirements for eligibility include having a business be existent for a good number of years and also qualifying for a specific sales minimum from the preceding year.
If you are a new business and do not qualify for an unsecured business line of credit, you can always try obtaining a secured business line of credit instead. The main difference between a secured and unsecured business line of credit is the collateral that is used as a backup for the lender, in cases where the business fails to pay back all of its dues. Since a secured business line of credit requires a collateral backup, it makes sense that it will typically have higher spending limits, and lower interest rates.
What are the Benefits of an Unsecured Business Line of Credit?
What are the benefits of an unsecured business line of credit? There are several benefits that come with having an unsecured business line of credit.
The first benefit is that an unsecured business line of credit allows businesses to easily transfer money and cash necessary for business expenses. This transfer of money can be conducted in a number of course, online.
The second benefit is that an unsecured business line of credit grants businesses fast access to money. What this means, is that business owners can really use any amount of financial credit that they wish to use, whenever they choose to do so. This is especially advantageous in unexpected situations in which companies need an immediate financial resolution. With an unsecured business line of credit, businesses will have the opportunity to use the cash that is necessary, instantly.
The third benefit that comes with an unsecured business line of credit is that your business will be able to develop a strong credit history. When your business pays back the funds that are taken from an unsecured business line of credit at the due date, it will help the business to build a good credit score. This gives a business the advantage of being able to apply for future bank lines of credit, and the possibility of accessing much better terms in any future lines of credits, or loans.
The fourth advantage that is included in the benefits of an unsecured business line of credit is that businesses get to have flexible payments with substantial credit limits. This is one of the principal factors that distinguish an unsecured business line of credit from a regular business loan. A business is able to choose when the full amount that is owed is paid back, and schedule a payback date that can help the company to really focus on company growth.
How to Get a Business Line of Credit?
How can your company obtain a business line of credit? The first thing that your business has to do, is to figure out if it is eligible to qualify for a business line of credit in the first play. Qualifying for a business line of credit focuses on the following factors: your business history, your business credit score, and your business monthly and yearly revenue.
The first thing that a lender will do will be to inquire into your personal and your business score. Some lender will only look at your business credit score; however, most lenders will look into your personal credit score as well, in order to make sure that lending you the funds that you require will not pose a huge risk on the creditor. The stronger that your personal and business credit scores are, the more likely you are to get approved for a business line of credit, and the more options you will have concerning the process. A new business lacking a substantial business credit history will usually opt for a secured business line of credit since creditors in this situation will be more likely to approve them due to the collateral backup in circumstances in which your business fails to pay back its dues.
The best thing that you can do for your business is to apply for a business line of credit when your business is at its optimal best. This will grant your business higher chances of getting approved for the business line of credit that you prefer, and will also higher the chances of receiving a higher credit line amount.
To apply for a business line of credit, you will need your personal information, your bank statements, your financial statements, information about the stakeholders, tax returns, a debt schedule, and legal documents. Legal documents include your business formation document, your business license and registrations, any contracts that your business has with third parties, and lastly, your business tax ID. Once you apply, you must wait to see if you have been approved. If you are not approved, you can always look into other business line of credit options that are available to you at that moment.
Is a Business Line of Credit Right For You?
Do you need to manage your business cash flow? Does your business need funds to buy inventory? Do you suddenly have to pay for an unexpected business expense? If the answer to any of these questions is yes, then a business line of credit makes is definitely worth looking into.
If you are looking to cover your working capital expenses and finance your business in a flexible way, then a business line of credit is something that can prove to be especially convenient, helping your business to focus and finance on growth opportunities. Maybe your business is a startup and requires funds in order to cover payroll or pay for rent. Perhaps your business is undergoing new projects which are a must, or you need the necessary funds in order to purchase new equipment. If you are afraid that your company might have gaps in cash flow and you want to ensure the smooth running of your business, then the answer to “is a business line of credit right for you” is yes.