The decision to apply for an unsecured line of credit should be weighed carefully with equal attention given to the pros and cons of managing the account. To make the wisest decision for your business, it’s best to give each argument individual attention. This article will focus on several benefits that credit lines afford a small business.
Credit to the Power of Three: the Biggest Benefits to Unsecured Financing
Lenders and borrowers alike can tell you a lot about the benefits of an unsecured line of credit, but that amount of information can be difficult to sort through. To make things easier, here are the three best things to know about unsecured financing.
Benefit one: collateral is an option, not a requirement. Whereas secured loans require asset-based backing, like property or a car, as part of the approval process; unsecured credit does not make this a requirement. As long as you show verifiable proof that you can afford to pay back the funds, approval is relatively simple. The catch comes in the loan amount and interest rate.
Credit lines are usually smaller than a traditional loan and have reasonable, but variable, interest rates. This is where optional collateral comes into play. If you need a bigger loan with a set or prime rate, you’ll want to consider putting some assets on the table to stand in place of any debt you acquire. This “insurance” will help protect you from penalties and legal action if you default on your payments.
Benefit two: the interest rate. As discussed above, the interest rate on an unsecured line of credit is lower than other financing options. Unlike credit cards, the lower interest rate of a credit line lasts for the life of your debt. There is no rate hike if you carry a balance for more than 20 days, the variable rate typically stays under 7%, and payment agreements are on a 6 to 10 year time table.
Business owners often prefer to use credit lines during a recession to avoid unexpected payment fluctuations or to cover high-cost expenditures. It is a money saving option for both long-term and short-term expenses.
Benefit three: apply, repay, reuse, credit as a renewable resource. The majority of unsecured business loans can be structured like a credit card. The borrower is given a set limit and, as long as the balance is paid, that credit can be reused as needed. This option eliminates the hang-ups of traditional loans and cash advances because businesses do not need to continually re-apply for funding.
As a rule, unsecured funds do not run on a term or have a pre-determined end date like their counterpart. You do have to meet certain approval guidelines, make payments as agreed, and avoid default; but honoring these terms gives you continual access to the funds.
Opening an unsecured line of credit has its risks, but with the right information, some wisdom, and deliberate financial management; it may be just the solution your business is looking for.