The Basics of Business Lines of Credit
A major roadblock in securing lines of credit for businesses is the need for collateral. Entrepreneurs may require funds to start a business or to grow an existing venture. However, a new business owner may not have enough collateral to be approved for secured business financing. Unsecured options may be the answer in this case.
The Risky Business of Collateral
Attaching your home or car to a business venture can be a risky proposition. What happens if your business fails and you can’t repay your loan? You will lose the collateral that was offered to ensure the line of credit. Offering personal assets as a guarantee for repayment may get you financing but may result in negative consequences if your business doesn’t succeed.
The Basics of Unsecured Lines of Credit
Unsecured financing takes the risk out of the transaction, at least for the borrower. The lender, however, takes on all the liability. For this reason, unsecured business lines of credit are a great option for new business owners with limited assets or for those entering an industry that is not well established. This type of financing works the same as a typical revolving credit line where the borrower can pull out any amount needed and only repay the money used.
Business Loans Versus Credit Lines
Entrepreneurs in search of financing may find it difficult to decipher between an unsecured business loan and line of credit. Both offer needed funds without the need for collateral, but a business loan requires a borrower to use all funds requested and therefore pay back all funds borrowed. Also, repayment terms and rates tend to be fixed. With a line of credit there is more flexibility as you only use what you need and repayment terms are based on how much you use, not on the total amount of the credit line.
Types of Unsecured Credit Lines
For business owners seeking unsecured credit lines, there are two main types of financing: traditional and alternative. The traditional option is harder to qualify for as it requires more documentation such as tax returns and financial statements. Alternative credit lines require much less documentation because they are offered by non-traditional lenders instead of banks. Because of fewer restrictions, the application and funding process is quicker.
If you don’t have collateral or can’t stomach the risk of attaching a personal asset to a business venture, an unsecured line of credit will give you the financing you need while reducing your liability. The documentation at your disposal and the need for quick funding will dictate whether you choose traditional or alternative funding. Either option will get you the cash you need to keep your business growing.
