Choosing Between Secured and Unsecured Credit Lines

Business lines of credit are among the most useful financial tools available, primarily because they are flexible enough to work for just about any business model or industry. When it comes to finding the right credit line, you do have options. Unsecured lines are a lot like credit cards in some ways. They tend to be available for close to the same maximum balance and interest rates, but the credit lines can be drawn from like cash, they are not limited to use for purchases. Secured credit lines, on the other hand, have much lower rates and typically enjoy higher maximum balances, but they require you to have some property you can attach to your credit line. So, which is better for your business?

How Much Capital Do You Need?

The reason secured lines of credit are less expensive for the same amount of capital is that the collateral lowers the risk to the lender. What you need to keep in mind is that by putting up the collateral, you increase your own exposure. If everything goes well, that is not an issue, but if you have any doubts about the possible loss of the property, it may be better to opt for an unsecured line.

It’s also worth considering whether the additional balance on your account is even necessary. If your credit line is primarily for petty cash management, it may not be worth securing. If you’re planning on making it the cornerstone of your operational budgeting and cash management, though, it’s a good idea to get as much capital for as low a rate as possible.

What Other Credit Products Do You Use?

While a line of credit is very useful, it’s rarely the only way businesses finance cash flow. A good preparedness plan usually involves a few channels for financing, as well as awareness of the criteria that could make you tap into your secondary funding. If you’re using business lines of credit for single-purpose financing or as a backup to something like invoice financing, then you may want to go for a simple, smaller, and unsecured credit line.

Your other debts can also affect your ability to qualify for secured lines of credit. If you already have loans that are attached to all your real estate holdings, you might not have the equity for a secured credit line. In that case, you can still usually qualify for an unsecured line if you have a good debt-to-income ratio, which is another reason to consider both options.