Unsecured vs. Secured Lines of Credit
If your business is cash-strapped or you just want to build your business credit score, you may be interested in getting a line of credit with your company’s bank. A line of credit can be a great way to get your business going again. However, it’s important to remember that not all credit is equal.
There are two kinds of credit you can get from a bank: secured and unsecured lines of credit. No type is necessarily better than the other, but it’s important to understand the differences and your options before you sign the dotted line.
The distinctive feature of a secured loan is that it is borrowed against something of value, which is collateral. If you want to get this type of credit, you will need something that has significant value to borrow against. This collateral can be the equity in your home, a car, or another piece of equipment.
If you default on this credit, the bank can legally seize the collateral. From the borrower’s perspective, this can be unnerving. However, the lender sees this as a great opportunity. Regardless of your ability to pay, the bank knows it will recoup its money.
Because this type of loan is more of a sure thing for banks, they are often willing to lend more at a lower interest rate than they would for an unsecured loan. That means that you, the borrower, can pay less over the life of the loan and get more use from it than you would with unsecured lines of credit. However, there is a significant personal risk.
Unlike secured credit, unsecured lines of credit do not require collateral. Instead, lenders rely on the reputation of the business or borrower to determine whether to issue the credit. This determination is where your business credit score is essential.
With unsecured credit, the financial institution takes on the majority of the risk. That can feel a little better as a borrower, but it has its drawbacks. Because the lender is taking a risk, it may charge significantly higher interest and allow for less credit than a secured line.
How They Are Alike
Whether you choose secured or unsecured lines of credit, there are a few features you should expect. For example, you may have more flexibility with what you can purchase than you would with a traditional loan.
Furthermore, the lender doesn’t charge interest on any part of the credit you don’t use. With some lines of credit, you don’t have set payment dates as you do with a credit card.