A small business line of credit is a financial tool that provides borrowers access to capital up to a certain amount. One of the major differences between term loans and business lines of credit is that a business line of credit is more flexible compared to a term business loan.
Business Line of Credit comes in two major forms – Secured and unsecured business line of credit as explained below:
Secured business line of credit: In a secured business line of credit, the lender asks the borrower to pledge their assets against the loan as collateral. Since this is a temporary liability, the lender may accept inventory or accounts receivable as collateral. They probably won’t ask for large assets like equipment or real estate. If the business fails to pay off the business line of credit loan, the lender will take the collateral.
Unsecured business line of credit: Most business owners looking to get a line of credit prefer this option because the lender does not require any assets as collateral. This is necessarily riskier for the lender, which means that there is a higher bar to meet in order to get approved. To get approved, borrowers are required to prove that they have good personal credit, good business credit, and a track record of generating revenue. Unsecured business lines of credit are often given for lower limits and at higher interest rates.
The features of each of the category of business line credit clearly show their pros and cons and their suitability for each business owner and the business needs. Consequently, the question of whether or not unsecured business line of credit can be the solution to the funding challenges faced by small businesses can only be answered by these businesses.