You can’t run a business without money. How do you get the cash you need to get started or grow, when you haven’t made the sales to earn any yet? If you are like many entrepreneurs, you seek out information about business lines of credit. There are two main types of credit lines for small businesses: secured and unsecured.
Secured business lines of credit are agreements between an entity like a business or an individual and a financial institution like a bank or commercial lender. The lender agrees to loan you money that you can access whenever you need it, up to a certain amount. You agree that if you don’t pay back the loan in full and on time, the lender has the right to take possession of an asset that you have put up as collateral.
Unsecured business lines of credit allow you to borrow money from a commercial lender, as needed, up to a certain amount, without having to risk any of your assets in order to do so. The lender takes on the risk because they believe that you, or your business, are more than capable of paying them back and they want your business. This type of financial transaction is more like having access to a credit card than anything else. You will only have to make payments on the money you have chosen to take out of the credit line. If you never use it, you will never be charged any interest.
Because they are the ones taking on the majority of the risk, it can be difficult to get approved by a bank for unsecured business lines of credit. Your company has to have an above average credit rating, and has to have maintained it over a period of years. In addition, the bank or lender will probably try and protect themselves by giving you a lower credit limit, and charging you a higher interest rate than they would have if your loan had been secured. That is why it is important to fully investigate the costs of both types of business lines of credit before deciding which one is right for you.