A line of credit for your business operates in much the same way that a personal credit card does. The lender assigns a credit line and you can borrow repeatedly up to that amount. Making a payment against your line of credit frees up what you can borrow. Just as with your personal credit card, you only pay interest on the funds you actually use and not the entire credit line.
While many small business owners appreciate the flexibility of lines of credit, this type of business funding can be challenging to obtain. It requires more documentation than other types of loans, and the lender reviews the account yearly to adjust the credit limit or even close the account if the borrower is not timely with payments.
Understanding the Difference Between Secured and Unsecured Business Credit Lines
Before applying for lines of credit, it’s important to understand the different types available so you choose the best option for your business.
An unsecured credit line is one that you receive without needing to pledge any type of collateral. Approval criteria is often stricter because of this. Even when approved, an unsecured business credit line often has a lower limit and higher interest rate than its unsecured counterpart. To obtain a secure line of credit, you must pledge a business asset. Lenders often accept accounts receivable or inventory as collateral in lieu of larger items like vehicles or business equipment. That is because they are only taking on a temporary liability.
Could Your Business Benefit from the Flexibility of a Credit Line?
Another big benefit of obtaining this type of credit is that you don’t need to apply for a new loan every time you need financing. Prime Wealth Development invites you to learn more about business credit lines and other alternative financing options for new and existing small business owners. Please contact us today to request an appointment.