What Are the Advantages of a Secured Line of Credit?
A secured line of credit is a way to obtain access to funds by putting up collateral to secure the credit. This differs from an unsecured line of credit where the borrower is obtaining funds based strictly on credit history and income. The secured line of credit can be advantageous to business owners, or to individuals seeking to establish or repair credit.
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Higher Credit Limits
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Because the business owners are putting up collateral, a secured line of credit can be much higher that an unsecured line, in some cases up to 10 times higher. This will help ensure that the business owners will have the capital on hand to weather slow periods or to purchase additional equipment and supplies when needed. Lenders are more comfortable since they are less at risk because they have access to the company's assets in the event of default.
Convenience and Flexibility
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Unlike loans which require a new application process each time, business owners have continuous access to their secured line of credit. This means that the funds can be obtained much more quickly and without the red tape of applying for a new loan. Repayment terms are often more flexible, in some cases requiring the business owner only to make regular payments on the interest. Business owners who use their line of credit responsibly may be able to receive an increase in their line of credit with relative ease.
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Establishing Credit
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For individuals who have a poor credit history or are trying to establish credit for the first time, a secured line of credit instrument such as a secured credit card is a way to develop good credit. If the business owner makes timely payments for a year or so, other potential creditors will be more likely to extend credit on an unsecured basis. As with a business secured line of credit, individuals will be putting up collateral to secure the line, such as an automobile or other personal property. In most cases, having two or three secured lines of credit are necessary to improve a credit score.
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