Unsecured business line of credit is one of the ways of getting business loan without collateral. A small business line of credit is an increasingly popular financial tool that shares similarities with a business credit card. The financial tool allows businesses to access the funds needed to meet their financial obligations. One of the major features of the business line of credit is its revolving balance, where borrowers carry the balance from month to month and interest is calculated based on the amount drawn.
Business line of credit is broadly categorized into 2 – Secured Business Line of Credit and Unsecured Business Line of Credit.
Secured business line of credit:
As the name suggests, a secured business line of credit requires a form of security from the borrower. Consequently, the lender asks the borrower, in this case, the business, to pledge their assets against the loan as collateral. Being a temporary liability, lenders tend to accept inventory or accounts receivable as collateral. In the same vein, the lender takes possession of the collateral in the event of a default by the borrower.
Unsecured business line of credit:
On the other hand, unsecured business line of credit does not require the borrower to provide any form of assets as collateral. Unsecured business line of credit is particularly popular with business owners due to the aforementioned feature. However, lenders tend to raise the bar of requirements to get an application approved as unsecured business line of credit is a riskier asset.
Business owners are often required to prove that they have good personal credit to get approved. The business credit must also be relatively good with the business providing a proven track record of generating revenue. One of the major drawbacks of unsecured business lines of credit is that they are often given for lower limits and at higher interest rates.