How Small Businesses Benefit from Unsecured Lines of Credit
At some point, every business tends to experience cash flow problems. While there are a variety of options for overcoming these problems, many of them come with drawbacks that may make them more trouble than they are worth. For small businesses, unsecured lines of credit can be just the option they are seeking. They offer a relatively low-risk solution to short-term funding issues.
With a traditional bank loan, your first payment is going to be due within a month or two of the approval of the loan and disbursal of funds. It does not matter if you haven’t needed the money yet or not. You still must pay on the loan. With a line of credit, you do not have to make payments until you actually use the credit that is extended. If you do not need it for six months, then it remains a safety net for when you do need it, and no payment is due.
Once you have been approved for unsecured lines of credit, you have revolving capital to use. For example, if you have a $10,000 credit line, and you use $2000 but pay $1000 back the next month, you still have $9000 you can use. With traditional loans, once you use the money you borrow, you no longer have access to it regardless of how much you repay.
An important factor to consider when borrowing money in any way is the interest rate that you will have to pay on the borrowed amount. Interest rates on lines of credit may be lower than loan rates because they have more competition. This competition works in your favor, allowing you to shop around to find the best terms.
Low Asset Risk
When you apply for a loan at a bank, it is likely that you will be asked to pledge some sort of collateral to secure the loan. That way, if you default on the loan, the bank can cover some of its losses by taking possession of the property against which you borrowed. Unsecured lines of credit do not require collateral from borrowers. If you have the solid credit history to be considered a low enough risk to your creditors, you are rewarded by not having to risk your own tangible assets.
When your business is in need of capital, consider your options. If you are in good financial standing and have a good business credit score, an unsecured line of credit is an option worth pursuing.