If you’re like the majority of small businesses, you’ve likely encountered an economic challenge or two. You are aware how it goes — a slow season has impacted your money flow, an emergency expense has put you in a bind, or else you need some extra cash to grow your business. If this sounds familiar, a flexible type of financing that provides you on-demand use of cash can help you weather through these tough financial times. One choice to consider is really a secured business line of credit.
Before you apply for any secured line of credit, it’s important to understand exactly what you’re engaging in. In this article, we’re likely to explore secured lines of credit and just how they are able to benefit your business. We’ll also look at the drawbacks of this kind of business funding, what you need to know before you decide to apply, where to find the line of credit that’s suitable for your business. Read on to find out if a line of credit can help you overcome your capital challenges.
How Secured Business Lines Of Credit Work
Unlike a traditional loan that provides you with a lump sum of money, a business credit line provides you with more flexibility and accessibility capital you need when you need it. A lender assigns a borrowing limit, similar to a credit card. Rather than swiping a credit card, though, you are making draws from your credit line. In other words, funds from your assigned borrowing limit are used in your business banking account.
You can draw just as much or very little cash as you need. You may also make multiple draws. The only real caveat is that you can only draw up to your assigned borrowing limit.
The funds out of your business line of credit can be used as nearly any purpose, from covering operational expenses to buying inventory or equipment, hiring employees, or paying an urgent situation expense. After making use of your credit line, you’ll begin to spend the money for lender back the borrowed funds plus additional fees and/or interest. You pay interest around the amount that you borrow.
What happens after you begin making payments depends upon whether you've got a revolving or non-revolving line of credit. If you have a revolving line, funds will be replenished while you pay down your balance. If the line of credit is non-revolving, you’ll have the ability to draw up for your assigned credit limit. Once that limit is reached, the lender will close your account.
When are applying for a secured line of credit, this means that a particular asset is used as collateral. While we’ll go into more detail relating to this a little later in this article, this simply means that the business asset is used to secure the borrowed funds. If you do not pay back borrowed funds as agreed, the lender has the right to seize the asset to be able to recoup the lost funds.
Assets Used To Secure A Type of Credit
We’ve already established that a secured credit line is backed by specific collateral. Typically, this can be a business asset that may be seized should you default on your agreement with the lender, although personal belongings may be acceptable by a few lenders. There are a few different types of assets that can be used to have a business line of credit. Including:
- Accounts receivables
- Commercial real estate
- Land
- Buildings
- Equipment
- Inventory
- Fixtures
- Personal real estate & other personal assets
The collateral requirements for a secured line of credit vary by factors such as the policies from the lender, your individual credit score, and also the maximum borrowing amount.
Secured Or Unsecured: Which Is Better?
When are applying for a line of credit, some lenders offer secured lines, while others offer unsecured lines. A line does not require specific collateral but typically needs a personal guarantee or UCC blanket lien.
So, which choice is the better choice? What may be right for one business might not be the best option for yours. There are a few factors to take into consideration regarding which is the best choice for your specific situation.
First, bring your credit rating into consideration. If you have a low credit score or negative marks on your credit history, you might not be eligible for a a personal unsecured loan. However, by setting up specific collateral to secure the loan, this takes a few of the risk from the lender. In turn, you may be more likely to be eligible for a a secured line of credit.
Because your specific collateral takes some of the risk off the lender, you may also be eligible for a lower interest rates when getting a secured line of credit. However, you need to observe that other factors may affect your interest rate, including your personal credit rating, amount of time in business, and annual revenue.
Opening a secured credit line typically permits you access to a greater borrowing limit. Again, everything goes back to risk for that borrower. If your line of credit is secured having a tangible asset, lenders feel well informed in setting higher maximum borrowing limits.
Another benefit of secured credit lines would be that the application process is typically easily. You’ll usually see there are fewer documentation and borrowing requirements having a secured credit line when compared to its unsecured counterpart.
If you have a solid credit rating and don’t wish to put your assets on the line, an unsecured credit line may be a better option. This also works best for borrowers that don't have assets to secure a credit line. However, if you do pursue a credit line, make sure that you comprehend the terms of borrowing. As previously mentioned, most lenders need a blanket lien or personal guarantee before issuing an unsecured line of credit.
Is A Secured Credit line Suitable for Your company?
If you want continuous use of capital to pay for operational expenses or grow your business, a secured line of credit may be right for you. Credit lines work for nearly any kinds of business and could be used for nearly any purpose. Lines of credit are specially useful when it comes to recurring expenses (like the purchase of inventory or supplies, or for use as working capital) or unexpected emergencies.
Any business that seeks a secured line of credit must have sufficient assets to secure the borrowed funds. In addition, the borrower must meet all additional requirements. This includes personal credit score, business credit rating, time in business, and annual revenues. Additionally, some lenders also provide restrictions against specific industries.
In some cases, you might be in a position to score a secured line of credit despite low credit score. However, you may face higher rates and fewer favorable terms, as well as be required to set up more collateral to secure the funding.
How To obtain a Secured Business Type of Credit
If you’ve made it this far along with a secured business credit line appears like a good fit for the business, the next step is to find your lender. Unsure of how to start? Keep reading to explore finding your secured line of credit.
Where To Get A Secured Credit Line
There are three kinds of lenders that offer secured business credit lines: banks, credit unions, and alternative lenders.
If you possess an existing relationship with a bank, start here when seeking a secured line of credit. Often, banks possess the best and flexible terms and provide high credit limits. However, banks also provide the strictest borrowing requirements. A solid personal credit rating, a longer period running a business (typically 24 months or longer), and better annual revenues may be required for your business to qualify. If you fall short on these requirements, you may still receive funding provided you are offering up enough collateral.
Secured credit lines can also be found through many lending institutions. Like banks, lending institutions typically offer very competitive rates and terms on their own credit lines. However, you must meet all borrowing requirements, which can be quite strict. You also should be a member of the credit union in order to qualify.
Finally, you can use an alternate lender to obtain your line of credit. There are many benefits of using an alternative lender. Including easy online application processes, fast time to funding (in some instances, just minutes after submitting the application), and fewer borrowing requirements. Some alternative lenders don’t even need a high personal credit rating and can provide you with a line of credit according to your collateral and the performance of your business. Around the downside, though, alternative lenders may have higher interest rates and extra fees that drive up the total cost of borrowing.
What You Need To Apply
Once you’ve found a lender and also have confirmed that you simply meet all requirements, it’s time to complete your application and submit supporting documentation. While the application varies by lender, there are a few general requirements to understand that can help you prepare ahead of time.
When you complete your application, you will need to provide general information about yourself and your business. Including but is not limited to:
- Your legal name
- Name of your business
- Personal contact information
- Business contact information
- Time in business
- Annual revenue
You can also be required to provide documentation to your lender before receiving a line of credit. Some common requirements include:
- Copy of driver’s license
- Articles of incorporation or other proof of ownership
- Business bank statements
- Voided check
- Profit & loss statements
- Balance sheets
- Business and/or personal tax returns
Finally, you will have to provide information verifying the collateral that will be used to secure the loan. This includes appraisals and evidence of ownership. There might be additional requirements in line with the policies of the chosen lender.
Final Thoughts
The flexibility and easy use of funding provided via a secured credit line make it a popular option for business people that need capital to function or grow their businesses. However, you should remember that there are some drawbacks associated with a secured credit line — it may be expensive, terms might not be as favorable as long-term lending options, and your assets are at risk if your business goes under.
It is up to you to determine whether a secured line of credit happens for your business. Assess the benefits and drawbacks, compare options, and determine how additional capital could improve your business. Ready to take the next thing? Take a look at our post, The Best Business Credit lines For 2022, to start exploring your options. Best of luck!
