A Comprehensive Guide from Charles Spinelli for Businesses While Opting Between Secured or Unsecured Credit Lines
A line of credit is a unique financial tool that aids businesspersons with a pre-agreed amount of credit and to access it whenever they are in need. Similar to a credit card, it allows businesses to borrow credit up to the set limit, repay it, and borrow once again without having to apply for a fresh one every time.
The vitality of a line of credit in the business world lies in its ease of access, convenience and flexibility as per Charles Spinelli. As a safety net, it helps small businesses to manage fluctuations of cash flow, meet short-term financial needs, or spend it for any other expenses from buying a machine to business promotion. Now, businesses wondering whether to opt for a secured or unsecured line of credit, keep reading the article.
Line of credit is categorized into two types secured and unsecured while understanding how they differ, their pros and cons will give an insight into which one will be the best fit for a potential borrower.
Defining Secured Line Of Credit
A secured line of credit is a form of funding option where borrowers need to collateralize any asset or property as security against the fund. The collateral works as a guarantee while lessening the risk to its lender. If the borrower fails to repay the loan, the lender will seize the collateral to offset the loss.
Pros of secured LOC
Low-interest rates: Typically, secured LOC is offered at lower interest rates as opposed to unsecured options. Here, the collateral stands as a security ensuring lesser risk of default and thereby lowering the interest charged to borrowers.
Easier and faster approval: A secured LOC is faster and easier accessible for a borrower as lenders generally do not look into credit scores or credit history, since the collateral lessens the risk of lending as per, Charles Spinelli.
Higher limit of borrowing: Given collateral remains involved, lending institutions allow higher credit limits to their clients.
Cons of secured LOC
Risk of losing collateral: The foremost risk for borrowers involves is the likelihood of losing the collateral, in case they cannot repay the loan.
Documentation and appraisal: Opting for a secured LOC may involve more paperwork as well as documentation for thorough approval of the ownership, market value, and present condition of the collateral.
Defining Unsecured Line Of Credit
Unsecured LOC is a form of funding that does not need borrowers to keep collateral. Unlike secured LOC, unsecured options chiefly depend on the creditworthiness and financial status of the borrower as the basis for its approval. Unsecured LOCs are generally approved depending on various factors including credit score, credit background, and the financial standing of the business.
Pros of Unsecured LOC
No collateral requirement: The foremost plus point of unsecured LOC is that it does not require the borrower to keep collateral and thereby eliminate the chances of losing valued assets in the event of default.
Cons of Unsecured LOC
Higher rate of interest: Unsecured LOC typically attracts a higher rate of interest compared to secured types. Lenders offset the higher risk by charging the borrowers higher rates to alleviate potential defaults.
Lower credit limit: Without collateral being security, lenders generally allow lower credit limits for unsecured LOC when compared to secured options.
Rigid eligibility requirements: Lenders are imposing rigid criteria for approval of unsecured LOC, such as insisting on higher credit score, long credit history, and well-established business standing.
How to Choose Between Secured and Secured LOC
It is worth noting while considering whether to go for secured or unsecured LOC, businesses need to evaluate factors with due diligence to find the most suitable option. The factors include availability of collateral, financial stability, interest rate, terms of repayment as well as financial needs and goals as per the opinion of Charles Spinelli.