What Are the Differences Between a Secured and Unsecured Line of Credit?

What Are the Differences Between a Secured and Unsecured Line of Credit

A business line of credit is one of the most flexible forms of financing that businesses can get. Unlike traditional loans, with a business line of credit, you only pay the interest on the money you’ve used, not on the whole amount given to you.

A business line of credit is not only flexible but also cheaper and more practical compared to other types of loans, like short-term installment loans, because of how you pay them back and the amount on which you pay interest. However, the business line of credit requirements are quite rigorous and strict compared to other types of loans and can be difficult to satisfy. To learn more about the business line of credit requirements that you need to meet, visit FinImpact and see whether this loan is suitable for you and your business.

Secured vs. Unsecured Line of Credit: The Differences

If you’ve decided on getting a business line of credit and have met all the required criteria, you will have to decide between getting a secured or an unsecured line of credit. Both types of business credit have their ups and downs and can impact your business differently. Here are the main differences between a secured and an unsecured line of credit:

  • A secured line of credit – if you opt for this type of business credit, you will have to put up something as collateral, like an interest in your business or some asset your business owns. By offering collateral for the loan, you give the financial institution a guarantee that you will pay for the loan, either with payments or with the collateral. The collateral reduces the risk for the lender, i.e., the financial institution, which will lead to you getting a better deal with a lower interest rate. Also, lenders (financial institutions) typically loan higher amounts to businesses that offer something as collateral. Additionally, the requirements you will need to meet for this type of business credit are not as rigorous compared to an unsecured line of credit. If you default on a secured line of credit, the lender will seize the asset you placed as collateral as payment for the loan it gave you
  • An unsecured line of credit – this type of business credit does not require you to put up anything as collateral, meaning that the loan payment will not be backed up or guaranteed. This type of loan will therefore have a bigger risk for the lender, which will, in turn, mean that you will have higher interest rates. Also, the overall amount that the lender (financial institution) will give you can be lower compared to a secured line of credit. If you opt for the unsecured line of credit option, lenders could ask you for a personal guarantee that you will pay the loan back. This means that, in the case that you default on your loan, the lender could take your car or house as payment, depending on what you put as a personal guarantee. If this is the option you want to choose, you should make sure that your personal finances are well organized before signing anything

Secured vs. Unsecured Line of Credit: What to Choose?

The most important factor to consider when deciding between the two types of business lines of credit is what you will use the money you are loaned for. 

If you need to borrow a smaller amount of money that you will use for everyday business purchases or expenses, you should get an unsecured business line of credit. A typical and common example of unsecured lines of credit is a credit card.

However, if you need a larger sum of money for bigger purchases like equipment or a company car, then you should get a secured business line of credit.

Terms and Interest Rates

The term of a business line of credit typically ranges from six months to two years, depending on your contract. The interest rates for a line of credit vary. For example, as of July 2022, the monthly interest rates for six-month lines of credit range from 2% to 9%. One-year terms can have a price tag between 4.5% to 18% per month. Additionally, business lines of credit with an 18-month term can have monthly interest rates of 6.75% to 18%. The interest rate you get will depend on the lender you choose, the term of your loan, and whether you go for a secured or an unsecured line of credit, among other factors.

Usually, it takes about one or two weeks to get the funds after you get approved by the lender you have chosen. In most cases, you will need to make monthly payments on the amount of the loan you borrowed. The rest of the loan that you have not used will be available to you. However, as mentioned above, you do not have to use the entirety of the loan if you do not need to.

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