Before considering taking out a loan, small business owners should acquaint themselves well with a few basic aspects of loans. An important distinction is that between secured and unsecured loans. As the names suggest, the nature of these loans differs due to the borrower agreeing to place some asset or collateral under the control of the lender in case of default. An unsecured business line of credit is thus offered without any collateral for the lender to depend upon.
By giving a collateral asset to borrow funds, a business can agrees that the lender, like a bank, can sell it to recover its losses. Secured loans examples include home mortgage or vehicle finance. With the presence of this security, lenders are ready to lower the interest rate, or increase the credit limit. A secured line of credit will be the home equity line of credit.
If the borrower goes for an unsecured line of credit, the lender is obviously taking greater risk, as there is nothing they can sell to recover their money in case of default. It is therefore more difficult to get an unsecured line of credit. A credit card is a good example of an unsecured and revolving line of credit.
For a business to get an unsecured line of credit to fund its growth, it must therefore have a good standing and image in the industry or market. The line of credit will still carry lower credit limits and higher interest.
As a line of credit, there is an advantage in seeking either a secured or unsecured agreement. A line of credit carries flexibility, convenience and can be used whenever required. The minimum amount for repayment is less, and there is also less pressure to repay the entire amount.
By keeping the above considerations in mind and learning more about secured and unsecured loans, small business owners can make prudent financial decisions and avoid any future surprises.