Are you considering obtaining an unsecured business line of credit? If so, there are a few tips you should keep in mind before making a decision. Both lending opportunities are very similar, but there are some key differences between them that can affect your chances for success. Here are several tips to help you choose the right business credit option for you.
The biggest difference between an unsecured business line of credit and a secured one comes in the form of interest rates. Unsecured business financing has generally higher interest rates than secured business financing. This is due to the fact that there is no collateral to secure the loan. Because of this higher interest rate, most small business owners opt for unsecured business financing over secured business financing.
In addition to interest rates, another key difference between an unsecured business line of credit and a secured one comes in the form of repayment options. Unsecured business lines of credit can be paid off at any time; however, this repayment option is not available to secured business lines of credit. The lender may ask that the small business owner to prove in writing that he or she has sufficient collateral to pay back the loan. As stated earlier, the lender may also request that the small business owner to provide a security, although this is by no means universal.
Most banks are not comfortable providing unsecured business line of credit. This is because the lender is taking on more risk than if the loan was guaranteed by property or real estate. Furthermore, these types of financing generally carry a much higher rate of interest than secured loans. A bank will also have trouble collecting the funds and will have even less incentive to refinance the small business owner’s current mortgage.
Small businesses generally operate on very tight margins. Financing costs can eat into the profits of these businesses making it difficult for them to make the needed headway in expanding their customer base. One way that these businesses alleviate some of the financial stress is to take out a small business line of credit.
These credit lines of credit are granted based on the creditworthiness of the borrower. Lenders are cautious about these types of credit lines because they are high risk and many lenders require applicants to have a good to excellent credit score.
Lenders are not concerned with your credit score and a poor credit score does not automatically disqualify you from obtaining such funding. The truth is that there are many lenders willing to provide this type of unsecured business line of credit. Smaller lenders are also available and they typically have lower interest rates than the larger lenders.