If your business needs quick access to cash, having a line of credit (BLOC) can be invaluable. However, before you apply for one, one of the first questions you need to ask is whether a secured or unsecured line of credit is right for you. Both options have pros and cons, so it’s important to carefully consider which one is best for you.

What is a line of credit?

Secured and unsecured lines of credit are types of financing that allow your business to borrow funds at will with pre-agreed repayment terms and credit limits. Whether you need money to deal with a business emergency or to pay wages in the off-season, you can use borrowed money to finance any aspect of your business that you see fit.

Secured and unsecured lines of credit, however, have different risk profiles for the borrower, so they usually have different limits and interest rates.

What is the difference?

A secured BLOC is a form of financing that requires collateral to ensure that you will pay back the amount borrowed, while an unsecured line of credit requires no collateral.

An unsecured line of credit usually requires a high FICO score, a certain number of years in business (usually at least two years) and strong cash flow. This type of line of credit typically ranges from $10,000 to $100,000, depending on the borrower’s needs, and has a variable interest rate, often tied to the prime rate plus a few percentage points.

A secured line of credit, which is usually for business owners with less credit, requires borrowers to pledge valuable assets as collateral. This collateral can include real estate, equipment, current and future invoices, and inventory. If you run an end-to-end business, you may even have to put up personal assets, such as a home or personal savings. However, a secured line of credit has certain advantages:

#1 Secured lines of credit usually offer lower interest rates

Fed Chairman Jerome Powell has already announced five rate hikes this year, with more to come.

The Federal Reserve System has increased interest rates five times this year with new arrivals, so the cost of capital is a major concern for borrowers. Because a secured line of credit is backed by tangible assets, the lender takes on much less risk in providing this type of loan, so depending on your FICO score and the amount of collateral you provide, there’s a good chance that the interest rate on a secured BLOC could be lower , than on unsecured.

#2 Your FICO score may be lower

Almost all lenders consider a good credit score to be one of the most important qualifications for financing, so if your FICO score is below 650, trying to get a loan can be frustrating. Because a secured BLOC is backed by assets, your chances of getting approved with a lower credit score are much higher than if you applied for an unsecured line of credit.

#3 You could get a higher line of credit

A secured line of credit may have a higher limit than an unsecured line of credit.

Although not in all cases, an unsecured BLOC is usually above $100,000 to limit the lender’s exposure. Even small business owners with great credit who can get approved for an unsecured BLOC often have to post collateral if they want to exceed the $100,000 limit. Depending on the value of the collateral being posted, a small business owner will likely receive a higher limit with a secured BLOC than an unsecured one.

No. 4. Secured BLOCs may have longer maturities

There are many benefits to securing your line of credit, one of which is that your repayment period will usually be longer than with an unsecured BLOC. Providing real estate as collateral can be particularly beneficial as the lender can increase the repayment period and limit as the value of real estate usually increases over time. In some cases, an unsecured BLOC can have a maturity of up to 10 years, while an unsecured BLOC is usually much shorter.

Cons of protected BLOCK

While a secured BLOC has its advantages, there are also potential disadvantages to consider before applying for one:

#1 You are risking your most valuable assets

To get approved for a secured BLOC, you need to put up valuable collateral. These may include your home or a highly valued piece of property. If your business relies on expensive equipment, such as tractors or medical equipment, or the future payment of invoices, these assets can be pledged as collateral but will be at risk if you are unable to repay your debt. So, just like with a personal loan, it’s important to make sure you can meet the repayment terms before taking out a secured BLOC.

No. 2 Additional work with documents

You will probably need to consult an attorney when applying for a

A secured line of credit will include a lot of paperwork as well as advice from a business lawyer.

secured BLOCK. That’s because you’ll need an expert to determine the repayment terms, especially if something goes wrong and you can’t pay back the amount you borrowed. A lawyer can negotiate what assets you have to surrender in the event of default.

#3 Interest rates vary

Although the interest rate on a secured BLOC is usually lower than an unsecured one, the rate will still be variable, meaning they will fluctuate as interest rates fluctuate. This highlights the importance of making sure you understand the exact terms of a secured BLOC before accepting it.

BLOC is not a credit card!

There is a common misconception that a line of credit is similar to a business credit card, but make no mistake, they are not the same thing. Yes, they both provide a line of credit and charge interest only on the amount you borrow. However, a line of credit should ideally be used for larger, predictable expenses than a credit card, as the interest rate is usually lower, and in some cases, you usually won’t get the cash from the line of credit within 24 hours. In addition, lines of credit have term limits and different repayment terms than a credit card.

A business line of credit is a great tool if you need to purchase new office furniture or appliances, if you need cash in an emergency, or if there is an unexpectedly high demand for one of your products and you suddenly need to purchase additional inventory. On the other hand, a business credit card is usually needed for sudden cash needs, such as getting a business lunch, or if your flight is canceled during a business trip and you suddenly need to pay for a hotel room. Business credit cards also offer perks like travel miles, but usually charge a higher interest rate than BLOCs.

Weigh your options carefully

A secure BLOC can give you great benefits when you need access to cash to grow your business or in an emergency. However, you need to carefully consider the terms of this type of financing and, as with personal finance, you should not spend more than you have to.

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