Businesses often use credit lines to provide flexible funding for short-term expenses. This financing type offers the security of having a cash reserve to meet operational costs during low-income periods. Unsecured lines of credit enable you to borrow money up to the set limit without backing the funds with an asset.
Reasons to Choose Unsecured Credit
There are several reasons you may prefer financing that does not require collateral. If you are starting your business and do not have adequate assets to back a loan, this kind of unsecured borrowing can help you stabilize your cash flow. Typically owners want credit lines as a temporary solution to fill gaps in revenue. Due to the short-term nature of the funding, you may want to reduce your risk and avoid collateral requirements.
Benefits of Credit Lines
Business lines of credit can offer many advantages over traditional loans. Lenders determine the credit limit available to you. You choose how you spend the money and in what amounts (within the limit). Following the predetermined payment schedule, you repay the money you took out with interest. Once paid, the funds become available to you again.
The application and approval processes for lines of credit are generally faster than those of conventional bank loans. If you have strong creditworthiness, you can gain approval rather quickly. Speedy access to cash can make a significant difference when your cash flow is tight.
Drawbacks of Credit Lines
While you take on less risk, the lender offsets their increased risk by charging higher interest rates and fees. The total credit limits are typically low, and payback terms are often short. If you have had your company for less than two years, you may need to sign a personal guarantee to secure the funding.
Uses for Unsecured Lines of Credit
There are many ways this revolving credit can assist you during seasonal downtimes or situations that lead to unexpected expenses. Some ways to utilize a line of credit include:
- Paying employees
- Funding a growth opportunity
- Covering the cost of necessary repairs
- Stocking inventory
- Making your rent payment
Credit Lines vs. Credit Cards
While similar, there are a few noteworthy differences between business lines of credit and business credit cards. The primary distinction is the increased flexibility of a credit line. You can easily access cash with a line of credit, whereas cash advances from a credit card can be costly. Additionally, credit lines usually have higher spending limits and lower rates than credit cards.
Unsecured lines of credit offer a way to maintain day-to-day operations when your cash flow is suffering. This financing option can be a valuable tool for small businesses.