The Different Types of Business Lines of Credit

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Business lines of credit are used frequently to help improve company cash flow, support expansion, purchase equipment, and handle a range of other financial needs. Often, they’re a popular financial product among those operating the estimated 33.2 million small businesses in the United States.

However, there are multiple kinds of business lines of credit, each with its own benefits and drawbacks. If you want to figure out which is best for your company, here’s a look at the different types of business lines of credit.

Secured Line of Credit

With a secured line of credit, businesses provide collateral to secure the loan. Essentially, your company selects an asset that would become forfeited to the lender should the business fail to meet its repayment obligations. When opening the line of credit, a lien is placed against the collateral, giving the lender specific rights to it under certain conditions, like not making payments.

Often, a secured line of credit is helpful for individuals with poor credit scores or companies that don’t have good credit scores. With collateral, lenders may be open to higher-risk lines of credit, as the asset safeguards them against losses. Plus, it can lead to more favorable terms and interest rates for the same reason.

The items companies can use as collateral may vary by lender. Real estate is commonly accepted, as well as company vehicles or high-value equipment. Usually, inventory, investments, outstanding invoices, or cash can also work.

Unsecured Line of Credit

Unsecured lines of credit don’t involve any collateral. Instead, the lender offers the credit line based on the borrower’s creditworthiness. As a result, this is a riskier option in the eyes of lenders, as there isn’t an asset that’s automatically forfeited if the business fails to make payments on the amount borrowed.

Since the risk is higher, many lenders require borrowers to sign a personal guarantee. Effectively, that’s an agreement stating that an individual becomes liable for the debt if the company fails to meet its obligation.

Often, qualifying for unsecured lines of credit is harder than if you go with a secured option. As a result, having good credit, solid revenue, and a significant amount of time in business is often required.

SBA Line of Credit

An SBA line of credit is supported by the Small Business Administration (SBA), a U.S. federal government agency. The SBA partners with private lenders to offer specific products to qualifying small businesses, with the credit lines provided adhering to particular standards outlined by the SBA, such as ensuring interest rates fall within a specific range.

Usually, the requirements mirror what’s found with private lenders for unsecured lines of credit. However, required credit scores may be higher in some cases, and other conditions can be more stringent than they are for some other lending products.

Which Is Right for You?

Which business line of credit is right for you largely depends on your company’s financial situation and your personal standing. High credit scores, solid revenue, and a significant amount of time operating could make an SBA line of credit a wise choice, as the interest rate could be lower than it would be for alternatives. On the other side, individuals or businesses with lower credit scores may need a secured business line of credit if they’re not eligible for unsecured options. For borrowers in the middle, a more conventional unsecured line of credit is potentially the best choice.