Secured Vs. Unsecured Line of Credit
If you need funds for your business, a line of credit is one way to obtain those funds. You can choose from a secured or unsecured line of credit. Each type of loan has different terms and agreements. The amount and interest rate you receive will depend on your selection. Check with several lenders before applying to ensure that you receive the most cost-effective terms.
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Collateral
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When you receive a secured line of credit, you will be able to fund the operations of your business. A secured line of credit means you must pledge some collateral or security for the loan. Your collateral could be the accounts receivable or inventory. If you miss your payments, the lender can lay a claim to your collateral.
Secured Line
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A secured line of credit lets you receive a larger credit limit, lower interest rate and more favorable terms in general than you would from an unsecured line. Lenders are taking less of a risk, and, based on your credit rating, they can let you have more money and charge you less interest. Over the term of the account, you will save a substantial amount of money in finance charges. Most business owners will look for a secured line of credit if they have to make large purchases such as equipment because there is more money available.
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Unsecured
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An unsecured line of credit can be used to purchase equipment, to meet payroll and for a host of other expenses. With an unsecured line of credit, you don't have to pledge inventory or accounts receivables as collateral. The amount of money you receive will be scaled back, and you could receive a higher rate of interest because this type of loan is riskier for a financial institution. Cash flow problems can be solved on a temporary basis using an unsecured line of credit.
Features
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The terms for lines of credit can vary, and some will have interest-only payments, prepayment penalties and flexible terms. A line of credit can be used over and over without reapplying, unlike a loan. Many business lines of credits have annual fees, but the interest rate is lower than most credit cards. You can use a line of credit in those situations where it is not feasible to take out a loan or the amount needed is greater than what a credit card can accommodate.
Accounts Receivable
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If you are using your accounts receivable as collateral, you must make sure that the lender believes they are adequate to be used as collateral. The portion of the receivables that is past due 90 days and greater may not be considered as collateral by the bank. The bank will review the credit and collection department to make sure good follow-up measures are in place.
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