The extent to which an unsecured small business line of credit helps a small to medium-size business depends on how well that business uses the funds at its disposal. If your business does not have the resources to provide collateral for a business loan, an unsecured credit line can help you get the money to grow, and also to squeak through difficult cash flow situations.
However, an unsecured business line of credit can also create the illusion that your company has the resources to spend liberally, causing you to incur debt and finance charges that are difficult to pay.
An unsecured line of credit is one of the easiest sources of business financing to find. The fact that it is unsecured means that you do not put any of your own funds at risk. This is a benefit because you may not have any other way to finance day to day operations, and you may not want to put your house or your life savings on the line. However, it is in your company’s best interest to act financially responsibly even if you are not risking much. Responsible financial behavior provides a solid foundation for business activity, creating healthy patterns that work to your advantage as your company grows, and also enabling you to establish a credit history that will give you access to less expensive credit in the future.
An unsecured line of credit will usually have a higher interest rate than a loan that is secured by your personal assets, because it involves a greater risk for the financial institution. For this reason it may be difficult to pay off the high finance charges that accrue from your use of this available capital. Your small business line of credit may seem like the greatest thing that ever happened to your business as you use it to pay off your bills and fund new projects, but once you have spent all of the funds that are available, you will inevitably have to pay the money back. If you did not have this extra, easily available money to spend, you might not have taken as many financial risks, buying equipment that may not yet be strictly necessary or launching new projects before you have done sufficient marketing research.
Despite these potential pitfalls, an unsecured line of credit can be an indispensable financial tool for a thoughtful, careful entrepreneur who simply does not have access to any other source of capital to use for the purpose of manifesting new ideas. If you are a cautious and responsible merchant that evaluates each new expenditure relative to the return it’s likely to bring, an unsecured line of credit could be the difference between your company stagnating because of lack of funds, and thriving because it has adequate resources.