Independent business owners can take loans through an unsecured business line of credit, often referred to as a revolving line of credit or LOC, in a manner that a standard business loan cannot. A borrower doesn’t accept your petition and then delivers the funds over to you in one single payment with a small business line of credit. Instead, your credit limit provides the option to draw up to a particular amount of cash.
Here are another few details to know regarding business lines of credit:
- When you take funds, you merely have to pay the interest (and only on the amount borrowed).
- There really are no prepayment charges, but unlike most credit cards, there is no interest-free time frame.
- Even if you aren’t constantly taking out loans on your LOC, you may be charged monthly or yearly costs.
- You can have cash transferred straight into your savings account via your LOC, enabling you to utilize the money with merchants who don’t accept credit cards.
- In most cases, there are no charges associated with cash advances.
- The money you withdraw from your LOC may actually take around one working day to be transferred into your bank.
That isn’t to say that an unsecured business credit line isn’t a viable option. Just remember to weigh the benefits and drawbacks of each company finance option before making a decision.
Unsecured Business Credit Line with Personal Guarantees
Investors will only consider company financing requests if they are confident with the associated risk. If you don’t have any assets to put up as security for a business line of credit, you may be required to sign a personal guarantee alternatively.
A personal guarantee (PG) effectively turns you into a co-signer on your company’s credit line. When you agree to a PG, you’re guaranteeing to reimburse the obligation if your company fails to do so. When you’re not able to put up collateral, this is another method for a creditor to ensure that you, the company owner, have some involvement in the game.
Is it a Smart Option to Have an unsecured business credit line?
If your firm has been in operation for a long and has a good credit rating, you may be able to obtain a low-cost business line of credit. Here are three main reasons why obtaining a company line of credit could be beneficial.
- A business line of credit (LOC) might be useful when your company needs funds to cover bills or take advantage of possibilities.
- Although if you don’t really need extra operating capital right now, getting a business line of credit in ahead might help your company plan for the future.
- If your lender discloses information to the business credit reporting agencies, a business LOC may help you create stronger company credit.
What’s the Difference Between Unsecured Lines of Credit and Business Loans?
Unsecured business loans, as well as unsecured business credit lines, are both non-collateralized lending options. A business line of credit is essentially a loan because it provides a predefined amount of money that must be repaid to the creditor over a specified period of time, plus a modest accumulated interest.
Business lines of credit, on the other hand, are more versatile than bank loans. Unlike an unsecured small company loan, which requires debtors to return a fixed sum based on the total borrowed amount, an unsecured business credit line allows them to only pay for what they utilize.
Repaying and refilling your unsecured company credit line is also relatively flexible, as opposed to the set payments characteristic with business loans. You repay on your own conditions and in your own time.
Some reasons to Choose an Unsecured business credit line Over a Secured Line of Credit
Still undecided about whether to go with an unsecured or secured business line of credit? We’ve outlined four factors why small business owners might consider becoming unsecured.
- You may not have enough security.
If you do not have the property to convince a creditor, an unsecured line of credit may be a great option for you. Since a secured line of credit involves security by default, if you don’t have enough resources to qualify, an unsecured line of credit can be a terrific way to receive the money you need.
- You would not like to put your personal or corporate assets on the line.
You may not wish to guarantee your personal and/or corporate assets for a multitude of justifiable reasons, in which case an unsecured business credit line is a right match.
- You don’t want a creditor to underrate your property.
Secured line of credit (and secured business loans) providers are known for devaluing security. This is done by banks to lower their security threshold much further. Borrowers, on the other hand, will be required to commit even more assets, increasing your risk.
- You require a line of credit as soon as possible.
Last but not least, obtaining a secured line of credit can take several months. Several mortgage lenders and supervisors must review the document, and the security evaluation procedure is extremely time-consuming. Unsecured business credit line applications are a lot easier to complete, and they are approved much faster.
Unsecured Business Financing Risk Assessment
For creditors, unsecured company funding is riskier, but for consumers, it is less hazardous. This is because collateral provides an extra guarantee to lenders. If debtors are incapable of paying off their debts, lenders can simply seize the asset, sell it, and recoup their investment.
With unsecured funding, this isn’t achievable. Alternatively, the creditor will have to rely on other factors, such as the debtor’s income or credit score, to establish if the applicant is reliable.
When it relates to an unsecured business credit line, debtors enjoy a significant advantage. Since there is no obligation for collateral and you are not required to pledge something, your possessions are protected in the case of a default.
