Credit is an integral part of business as it can help your business grow. In addition to that, it can help lessen your financial burden. Who does not want both, right? While you can loan a small amount of money easily, it is difficult to get a big loan – which is essentially what you need for your business. For your business to run smoothly, you need to determine what type of loan you are looking for. More importantly, you must think about whether or not this type of loan is beneficial to your business in the long run. If not, then do not make the mistake of getting one as it will just land you in debt.
In this article, we will discuss secured vs. Unsecured lines of credit.
A secured type of credit would mean that your credit grantor is in possession of your asset whereas the latter does not require any collateral. An unsecured type of credit, on the other hand, is riskier as the bank assumes that you can pay off the credit. Hence, it is more difficult to be approved for an unsecured type of credit as your lender will need to screen you thoroughly.
As mentioned above, with a secured type of credit, your bank possesses your asset – this asset is known as collateral and it can be seized by your lender at any point in time if you fail to pay back the loan that was provided to you. The most common type secured credit would be home mortgages – the bank lends you money in exchange for the property. While you may still live in your home, you can be ousted out should you fail to make proper payments on time.
A lender or your bank would much rather prefer a secured line of credit as they are guaranteed something. The same applies for a borrower – it can also be attractive as you can get a large amount of money with lower interest rates as compared to unsecured line of credit. Just remember that it is crucial to make payments as required as you can lose everything that you have put on the line.
With an unsecured type of credit, there is no asset acting as a collateral. With that said, the lender or bank is taking a huge risk by providing you with money that may not be potentially returned to them. Since this type of credit is “free”, banks usually make money through placing high interest rates. In addition to that, the money that you will receive may not be as high as what you can get with a secured type of loan. For this reason, smaller companies who are looking for big money to expand their business should not look into this type of credit – banks will not allow it as your company has not yet built the reputation needed for them to acknowledge you and your employees as good debtors.
Perhaps the most popular example of an unsecured loan would be your credit card. For those of you who have one, you remember the screening process – forms, interviews, assessments, etc. While it may be time-consuming, it is the only way for banks to determine whether you are worthy to receive one or not. Now you know why – banks need to ensure that you are able to pay them off in full and on time. If they trust you, you need to make sure to maintain that trust as well.
So, there you have it – the difference between secured vs, unsecured business lines of credit. Read more at businesslineof.credit. You can also check out these tips for small business owners: https://www.sba.gov/blogs/10-cant-miss-business-credit-profile-tips-small-business-owners.
Secured vs. unsecured business line of credit? Which is right for you? We help you weigh the pros and cons at businesslineof.credit.