Advantages and Disadvantages of Unsecured Business Line of Credit
Capital is a critical component of business operations. Small business owners will need access to not just start their business, but use it to manage operations, pay bills, and expand the business. Business lines of credit are a successful financial product because they can provide valuable assets to a growing business in all its growth stages.
Amongst many small business funding products, a business line of credit is one of the most sought-after and needed resources for business owners. A business line of credit can be both secured and unsecured. Here we discuss some advantages and disadvantages of an unsecured business line of credit.
What Is an Unsecured Business Line of Credit?
Of the financial products, you’re probably familiar with, a business line of credit is the most like a credit card. You receive a maximum balance and take money from that balance as you need it. Each month, you make a minimum payment based on the current balance of the loan.
A business loan, by contrast, works more like a mortgage or car loan: A bank lends you a lump sum one time, and you make regular payments each month until it’s paid off.
- An unsecured business line of credit can provide small business owners with quick cash. Many lenders can provide approval within minutes, do not require any collateral, and provide expert advice over the use of this form of funding.
- Because small business owners may face unexpected difficult times, this small business funding can give access to whatever amount of credit is required. Usually, a certain amount is expedited to a business for their use, and no interest rates are charged unless a withdrawal happens. This makes it easier for the owner to withdraw cash when needed.
- Repayments are usually flexible and the borrower can choose to pay either the full amount or small fixed weekly or monthly payments.
- Helps separate personal and business expenses.
- Can be used to pay working capital needs such as salaries, suppliers, and bills.
- Can help purchase or lease new office equipment, while paying for the full amount in installments.
- An unsecured business line of credit requires discipline else there is a risk of debt buildup and a possible default when a business goes bankrupt.
- Interest rates are high because no collateral is needed, skipping payments reduce the availability of cash in the future.
- Lenders may require bank statements and accounting data attachments to monitor the health of a business and their ability to repay their loans either weekly or monthly.
- Non-payment of interest or full amount can lead to credit score degradation and reduces access to future small business loan sources.
- Although it can be quick to receive, some lenders will do initial scrutiny of bank accounts, the source of funding, and business /prospects before forwarding cash.
The other option to ensure business payments is using a secured business line of credit, or a business credit card. A business credit card is a form of an unsecured line of credit and can be used just like any other credit card to purchase goods and items. Every business owner should hold a strategic view of their borrowing needs. Seeking loans and using them in an ineffective manner can lead to debt buildup because an owner might not be able to pay high-interest payments
Should You Pursue an Unsecured Business Line of Credit?
Unsecured business lines come with a spectacular feature of revolving terms that is based on the fact that you can access them for the duration of your business. This is a necessity for small businesses because they will constantly need working capital to operate and unsecured business lines are the perfect solution.